An interest rate hike in the UK is “moving closer”, the governor of the Bank of England told MPs in comments that have fanned market expectations that policymakers could start to tighten borrowing costs before the end of the year.
Speaking to the Treasury select committee on Tuesday, Mark Carney also expressed misgivings about the euro project, the sustainability of Greece’s debts and the prospects for the embattled country’s economy in the wake of this week’s deal hammered out by leaders in the single currency union.
His comments on interest rates had immediate impact on financial markets where investors are positioning themselves for the world’s big central banks to start tightening policy after years of ultra-low borrowing costs ushered in by the financial crisis.
With official figures earlier confirming inflation has slipped back to zero, well below the Bank’s 2% target, most economists do not expect UK interest rates to start rising from their record low of 0.5% until 2016. But Carney told the parliamentary committee that households should start to manage their finances with a future hike in mind.
The Bank governor noted the UK economy had been performing well, that wages were starting to pick up and that employment had seen a big increase, and he reiterated his view that people should prepare for a rise after more than six years of no change in rates.
“The point at which interest rates may begin to rise is moving closer with the performance of the economy, consistent growth above trend, a firming in domestic costs, counterbalanced somewhat by disinflation imported from abroad,” Carney told the Treasury committee.
The pound strengthened and government bond yields rallied after his comments in a wide-ranging testimony that also covered George Osborne’s budget last week.
Carney repeated previous reassurances to households that when interest rates do start to rise, it will happen only gradually and that the Bank would watch the effect on people closely. “Once rates begin to adjust, we expect for those adjustments to be at a gradual pace and to a limited extent. We will learn about the sensitivity as rates begin to adjust, we will watch it very closely,” he said.
Carney and his fellow member of the Bank’s monetary policy committee, David Miles, reiterated that rates would not return to levels seen previously. In the past he has said rates would peak well below the previous average of 4% to 5%.
“I do think there are a variety of factors that mean that the new normal, certainly over the policy horizon over the next three years, is substantially lower than it was previously,” said Carney. “I see no scenario in which they [rates] would move towards historic levels.”
Miles said that perhaps the “new normal is a little bit lower than Bank rate at 5%”.
Their fellow policymaker Ian McCafferty, who last year voted against the majority of the committee for rates to rise to 0.75%, repeated his concerns about wage growth having an impact on wider inflation in the economy.
“The balance of risks that we face is shifting as we look over the course of the forecast. The near-term risks to inflation have therefore been on the downside because of that risk of persistent lower inflation because of behaviour change. As I look out towards the end of the forecast my perception of the risk starts to change towards the upside,” McCafferty told MPs.
It was the first session since the general election for the new-look Treasury select committee – one of the most influential in Westminster. The Conservative MP Andrew Tyrie, returning as chairman of the committee, kicked off with a question about the prospects for Greece’s recovery.
Carney said the statement on Monday from eurozone leaders was an attempt to facilitate such a recovery but that it “requires Herculean efforts from all sides, not just the Greeks in terms of structural reform”.
He also revealed serious misgivings about the euro project itself. “The process by which this agreement was struck, the nature of the agreement, the scale of the challenge, underscores the series of institutional shortcomings that still exist within European monetary union,” Carney said.
“There are big execution risks on all sides, including execution risk around the profile of the debt which in the judgment of the IMF and I believe other authorities, and we would share those judgments, is not sustainable in its current form.”
This article was written by Katie Allen, for theguardian.com on Tuesday 14th July 2015 13.26 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010