In a speech at Lincoln Cathedral yesterday, Mr Carney said the base rate, which has remained at 0.5% for over six years, could begin to move upwards by the “turn of the year.”
He said that the most likely scenario was a gentle rise, moving towards rates “half as high” as norms in recent history, suggesting a rate ceiling of about 2% to 2.5% in the short to medium term.
Mr Carney’s comments suggest the interest rate environment has changed in recent months. His views are likely to be influenced by a number of factors including an expected rise in rates from the US Federal Reserve as early as September and wage growth in the UK.
On the likely inflation and interest rate scenario for the near future, Mr Carney said: “The MPC’s intention is to return inflation to target in a sustainable manner within two years. That means setting Bank Rate to eliminate the remaining slack in the economy, bringing about the sustained increase in costs necessary to achieve overall inflation of 2%.
{desktop}{/desktop}{mobile}{/mobile}
“I expect that this will involve raising Bank Rate over the next three years from its current all-time low of ½ per cent. The need for Bank Rate to rise reflects the momentum in the economy and a gradual firming of underlying inflationary pressures – a firming that will become more apparent as the effects of past commodity price falls drop out of the annual inflation rate around the end of the year. It also reflects the lags in monetary policy, given that the peak impact on inflation of a given adjustment in interest rates is likely to materialise around 18-24 months after the change.”
“We expect Bank Rate increases to be gradual, and limited to a level below past averages...It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Mr Carney said the Bank of England would monitor the impact of interest rates closely as rates began to rise and particularly the impact on mortgage borrowers who could feel the changes in a year’s time.
He said: “Given these considerations, the MPC will have to feel its way as it goes, monitoring a wide range of indicators and adjusting the pace and degree of Bank Rate as it learns about the effects of higher interest rates on the economy.“