Mark Carney, the governor of the Bank of England, has said people should focus on a medium-term “new normal” of interest rates around 2.5 per cent, rather than worrying about when the bank makes its next slight rise above 0.5 per cent.
Pressed on when interest rate rises should be expected, in an interview on BBC Radio 4’s Today programme, Mr Carney said Britain would not be returning to the “old normal” of interest rates around 5 per cent, but the economic conditions could be right for the “new normal” of around 2.5 per cent in the first quarter of 2017.
He said: “We have put out a forecast in May where we get back to full employment, where inflation gets back to target, where the economy gets back to something approximating normal - normal as it is after a financial crisis - and with interest rates in the range I just quoted...that date at the end of the forecast horizon is the first quarter of 2017.”
As reported by FastFT, Mr Carney said he was not giving a guarantee on this, but the new normal of lower interest rates than historically should happen because things had changed.
He said: “Households have a lot of debt, the government is still consolidating its financial position, Europe is weak, the pound is strong and the financial system has been fundamentally changed - it has to carry a lot more capital, it has to carry a lot more liquidity insurance and it will pass on those costs to borrowers.”
As a consequence of all these factors, Mr Carney said the new normal would be materially lower than the old normal.
He said: “The big picture is not whether the bank rate goes from half a per cent to slightly above that lowest ever level. The big picture is where interest rates go over the medium term. because if
“I’m taking out a mortgage that’s what I care about and if I’m thinking of investing in a new plant, if I’m thinking of hiring people, that’s what I care about.”
