The continuing low rates in the mortgage market may come to an end at the start of 2016, as a decision on whether to raise rates will come into “sharper relief” then, Mark Carney has said.
The governor of the Bank of England told the Treasury Select Committee that August’s events in China had increased downside risks but would probably not have had a significant effect on the thinking of the monetary policy committee.
He reiterated the bank’s prediction that interest rates would begin to rise gradually in the second quarter of 2016 - which would be good news for savers, but unwelcome news for the mortgage market.
Mr Carney said: “My view is that if the economy follows the path broadly consistent with this forecast then the decision at least for me will come into sharper relief around the turn of the year.”
He told the TSC that this was not a “pre-commitment to do anything particularly”, but explained that if the bank has seen a year and a half of the economy growing above trend, with higher unit labour costs, rising inflation and wage growth moving above 3 per cent, he said the decision would come “into sharper relief and it may be appropriate to withdraw stimulus at that point”.
However, he admitted: “A lot can happen between now and then.”
According to the ONS, inflation in August fell to 0 per cent from 0.1 per cent the previous month.
Mr Carney said about three-quarters of the deviation from the 2 per cent target could be attributed to unusually low contributions from energy, food, and other imported goods prices.
The bank’s August inflation report said the falls in energy prices of the past few months will continue to bear down on inflation at least until the middle of next year but added that there is little evidence in wage settlements or spending patterns of any deflationary mindset among businesses and households.
Ian McCafferty, a member of the MPC who gave evidence to the TSC alongside Mr Carney, told the committee inflation could end up overshooting the target. He said: “When combined with the evidence that I see of a tightening in the labour market over the course of 2016/17, the risks are that wages will pick up a little faster. In my view, this means we would see a slightly greater overshoot by early 2017 than the central projection in the forecast.”
Alan Solomons, director of London-based Alpha Investments & Financial Planning, said: “I think there is a strong case for interest rates going up.
“The economy is doing well and there are arguments that it is causing distortions in the market which are quite valid.”