The Bank of England’s Governor, Mark Carney, announced yesterday that the first hike from the historic low of 0.5 per cent could come sooner than expected, putting households, businesses and markets on notice that an increase in the cost of borrowing was fast approaching.
But the surprise disclosure will provide welcome relief for hard-pressed savers who have been squeezed by interest rates being left at 0.5 per cent for more than five years.
Mr Carney said: “There’s already speculation about the exact timing of the first rate hike and the decision is becoming more balanced. It could happen sooner than markets currently expect.”
His announcement sent the pound surging close to 1.70 US dollars, a level not seen since 2009, while it also reached a 19-month high against the euro. Analysts had previously been expecting the first hike in spring next year, but Mr Carney pointed to growth being much stronger and unemployment falling much more quickly than had been expected.
He caught the City off guard when he used his first Mansion House speech as governor to say that the “gradual and limited” increases that would be needed as the economic recovery progresses were “coming nearer”.
Mr Carney also signalled that the Bank could take “graduate and proportionate actions” within weeks as a separate measure to cool the threat of an overheating housing market – described as the greatest danger to the economy.
The British Chambers of Commerce (BCC) urged the Bank not to “jump the gun” on interest rate rises, and executive director of policy and external affairs, Adam Marshall, said: “Earlier than expected rate rises could mean current levels of growth are “as good as it gets” for the UK economy.
“The case for acting more swiftly has not yet been made. If the housing market is the principal concern, there are other tools at the Bank of England’s disposal to cool the market.
“If we are to see continued business investment growth, following the abysmal levels seen over far too many years, companies need to be confident they will be working in a low interest rate environment, facing only gradual rather than sudden change.”
BCC chief economist David Kern said Mr Carney’s remarks added to upward pressure on the pound following the European Central Bank’s recent rate cut which has sent the euro lower.
He maintained the UK recovery is “still facing obstacles”, and it was premature to consider early interest rate rises. The CBI’s Director-General, John Cridland, claimed that while the economic recovery is “firming up nicely”, any change in monetary policy should ensure it “isn’t blown off course”. There was speculation that minutes of the last meeting of the Bank of England’s rate-setting committee, to be released in the coming week, will show one or two members voting for a hike after a period of unanimously backing no change.
Interest rates were last increased in the summer of 2007, but were slashed to 0.5 per cent at the height of the downturn in March 2009 as policy makers aimed to help nurse the economy back to health, and have remained there ever since.
Pound at five-year high: Page 24