InvestmentsAug 13 2014

Carney: Rates to hit 2.25% in 2017

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‘Normal’ interest rates are unlikely to be higher than those of “yesteryear” and will only hit 2.25 per cent by the first quarter of 2017, Bank of England governor Mark Carney said.

Mr Carney said today (13 August) that given broad forces acting on the economy, “normal interest rates of tomorrow are likely to be lower than those of yesteryear”.

The BoE’s latest inflation report showed that the Monetary Policy Committee’s expectations for gradual and limited rate increases are shared broadly by markets.

Mr Carney said: “The path of bank rate implied by market yields, and on which this forecast is conditioned, rises by only 15 basis points per quarter and reaches only 2.25 per cent by the end of the forecast period.”

The end of the forecast period is the first quarter of 2017.

Mr Carney went on to say that as the economy normalises, the bank rate will need to start to rise in order to achieve the inflation target.

The full inflation report noted that ‘income gearing’ remains relatively low in aggregate, reflecting low interest rates. This is likely to rise as interest rates pick up, with rates on some mortgage products, in particular those with longer maturities, having already started to increase.

Mr Carney warned that borrowers with fixed-rate mortgages are not immediately exposed, although the proportion of new mortgages taken out at fixed rates has increased steadily from less than half in 2010 to more than 80 per cent in the first quarter this year.

The report also explained that households with higher levels of debt relative to their income are likely to be more vulnerable to shocks to income or interest rates.

The Financial Policy Committee recommended that mortgage lenders limit the proportion of mortgages at loan to income multiples of 4.5 and above to no more than 15 per cent of new mortgages.

It also recommended that when assessing affordability, lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, bank rate were to be 3 percentage points higher than the prevailing rate at origination.