Regulation  

Carney says 'gradual' rate rises are coming

Carney says 'gradual' rate rises are coming

Bank of England governor Mark Carney has told the International Monetary Fund (IMF) that UK interest rates are likely to rise soon, though the increase will be “gradual and limited”.

In a speech to the IMF yesterday (18 September) Mr Carney repeated the language that emerged when the Bank of England’s Monetary Policy Committee (MPC) last week, which said if economic conditions continue as they are in the UK, then a gradual withdrawal of monetary stimulus in the economy will be appropriate.

He said the policies implemented by the Bank of England in the immediate aftermath of the EU referendum in June 2016 had “worked”.

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“Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations”, he said.

Mr Carney said there is a limit to what the Bank of England can do to mitigate the negatives of the UK leaving the EU, but that the bar for any monetary policy action is “high”.

The governor said the central bank have a number of tools they can use to contain credit growth and inflation in the economy, with interest rate rises “a last resort”.

Also in the governor’s speech was his comment that the short-term effect of the UK leaving the EU would be “disinflationary”, that is act to limit inflation, because UK exports would fall due to the lack of trade deals with the EU.

He said even if new trade deals happen, it will take time for businesses to build the new relationships needed, meaning there will be a gap, during which time export levels will fall, that reduces economic activity in the UK and so acts as a brake on inflation.  

If there is a natural brake on inflation caused by the market, then there is less reason for the central bank to keep putting rates up to curb inflation.

Mr Carney’s comments come in light of the market now pricing in a near 100 per cent chance of UK interest rates moving upwards within 12 months.

Economists at HSBC released a note on 18 September saying they expect two interest rate rises by March 2018.

James McCann, senior global economist at Aberdeen Standard Life, said recent comments from the Bank of England mean he now expects four interest rate rises by the end of 2019.

David.Thorpe@ft.com