Markets bet on rate rise this year after hawkish Carney intervention

The UK’s biggest builders — Persimmon, Taylor Wimpey and Barratt Developments — plunged 5% while Bovis Homes and Bellway sank 4%

Traders are now pricing in a rise in rates from the Bank of England before the end of the year, as financial markets were sent scrambling yesterday by Mark Carney’s unexpected shift on the timing of monetary tightening.

The Governor’s comments at the Mansion House this week – where he disclosed that the first rate rise could occur “sooner than markets currently expect” – mean the consensus now is that the initial rise will take place in the next six months, rather than in the first quarter of 2015.

The market interest rate curve now shows rates nearing 1.75 per cent by the end of next year. That would add roughly £140 to the monthly bill of someone with a £200,000 rate-tracker mortgage.

The Governor’s words, which suggest the Bank of England could lead the rest of the advanced world in the monetary tightening cycle, also sent sterling close to five-year highs against the dollar, with the pound touching $1.69 at one point in trading.

The euro dipped to its weakest level against the pound since 2012. There was also upward pressure on British 10‑year gilt yields, which drifted up to 2.79 per cent.

The Governor’s comments came as a shock to the markets because he had previously been perceived as relatively dovish on rates and inclined to keep them on hold at 0.5 per cent for longer than some of his more hawkish colleagues on the Bank’s rate-setting Monetary Policy Committee.

The Bank said earlier this year that it would hold rates until more slack in the labour market had been absorbed. But official data released this week showed that unemployment fell again in the three months to April, declining at a rate of 6.6 per cent, although real wages dropped again.

The Office for National Statistics reported yesterday that construction output grew by 1.2 per cent in April. It also doubled its estimate for the sector’s expansion between January and March, meaning that the estimate for GDP growth in the first quarter could ultimately be lifted from 0.8 per cent to 0.9 per cent.

Michael Saunders of Citigroup said Mr Carney’s change in tone could reflect a calculation on his part that by moving more quickly towards the first rate hike, the MPC will be able to ensure subsequent rises are more gradual. “The alternative policy of waiting until average earnings growth picks up significantly would probably then require rates to rise even faster or further,” he noted.

Economists were divided yesterday on how damaging earlier rate rises could be. “Assuming that an earlier rise would still be followed by a gradual tightening of policy, then the impact on the economy would be minimal,” said Andrew Goodwin of Oxford Economics. But Matthew Whittaker of the Resolution Foundation warned that the number of mortgage borrowers in financial difficulties could double to 2.3 million if rates rose rapidly to 3 per cent over the coming years.

“Mortgage debt… is still substantial, even after years of economic downturn, and it could start to look precarious for many households over the coming years,” he said.

“The Bank will have to think carefully about the impact on the large number of mortgagors who are already devoting a large chunk of their income to repayments and those who would have to do so after even modest rate rises”.

Start your day with The Independent, sign up for daily news emails
News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tvPoldark episode 8, review
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
Arts and Entertainment
Ramsay Bolton in Game of Thrones
tvSeries 5, Episode 3 review
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence