The first hike in interest rates since the global financial crisis broke is “getting closer” and may come next spring, the Bank of England’s Governor said yesterday.
Addressing the Trades Union Congress in Liverpool, Mark Carney said that although there remained some uncertainty about the outlook for wages and productivity, the economy did have momentum. “Uncertainty does not mean stasis,” he said. “You can expect interest rates to begin to increase.”
Mr Carney noted that forecasts made by the Bank last month showed that if rates started to rise in spring 2015, around the time of the next election, inflation would hit the Bank’s 2 per cent target in three years’ time.
“This seems like a slightly firmer intention and message” said Sam Hill of RBC Capital Markets. The Governor’s words briefly lifted the pound to $1.6147, although it later fell back. Ten-year gilt yields briefly touched a two-week high of 2.529 per cent, before ending flat on the day.
In recent years, traders have been pushing back their bets on the date of the next rise in the Bank’s base rate, calculating that the uncertainty over the Scottish referendum result would prompt policymakers to err on the side of caution.
However, Mr Carney insisted that political considerations would have no influence on the timing of the next rate rise. “We’re absolutely indifferent to the political cycle, to who’s in government, who might be in government, who was in government,” he said, answering questions from the audience of trade unionists. “We manage monetary policy to achieve a target and if we need to raise interest rates or lower them for that matter before a vote, election, referendum or anything, we will do what is necessary to achieve that target.”
The latest forecast from the National Institute of Economic and Social Research yesterday pointed to a slight pick-up in the rate of GDP growth. NIESR said the economy grew 0.6 per cent in the three months to August, up from 0.5 per cent in the three months to July.
Separately, the ONS reported that the trade deficit widened to £10.2bn in July, up from £9.4bn the previous month.
It also said that manufacturing output grew by 0.3 per cent in July, in line with expectations. “The widening deficit was driven by rising imports, rather than falling exports, presumably reflecting the continued strength of domestic activity,” Jonathan Loynes of Capital Economics, said.
“And with survey evidence on other key sectors such as services remaining strong, there seems little reason for now to expect overall economic growth to slow in Q3 or beyond.”Reuse content