Carney kicks base rate increase into long grass

Carney kicks base rate increase into long grass

Bank of England governor Mark Carney has postponed an increase in interest rates, sending the pound’s value against the dollar tumbling.

Mr Carney, who had predicted several month ago that an increase in interest rates would come into “sharper relief” at the beginning of this year, today (19 January) said the time is no longer right.

Speaking in the Peston Lecture at Queen Mary University of London he said the UK’s economy was being affected by a “powerful set of forces”.

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He said: “Last summer I said that the decision as to when to start raising Bank (base) rate would likely come into sharper relief around the turn of this year.

“Well the year has turned, and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates.

“This wasn’t a surprise to market participants or the wider public. They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.”

The announcement led to the value of the pound against the dollar falling to 1.421.

Mr Carney added the timing of a rate increase had to depend on economic prospects not the calendar.

He said: “This journey doesn’t have a set timetable; only an expected direction of travel.”

Progress would need to be seen in core inflation measures, UK domestic pressures as well as momentum and slack for a rate rise to take place, Mr Carney said.

He said: “It is clear to me that, since last summer, progress has been insufficient along these dimensions to warrant a tightening of monetary policy.

“The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer.

“This may mean modestly weaker cost growth through this year, with the likely path for inflation, both headline and core, softer as a result.

“In short, recent developments suggest that the firming in inflationary pressure we had expected will take longer to materialise.”

David Lamb, head of dealing at the forex specialists Fexco, said: “The prospect of a UK interest rate rise hasn’t been kicked into the long grass. The governor hoofed it right out of the park.

“Mark Carney’s prediction - made last summer - that we would have greater clarity on interest rates at the start of 2016 has been completely overtaken by events.

“Six months on, the prospects for UK interest rates remain as clear as mud.”