Posted on Wednesday 12 February 2014 by Ulster Business

Carney low res

Investors and analysts expect the Bank of England to begin raising interest rates early next year after the central bank's governor Mark Carney announced an overhaul of its interest rate policy.

Launching its forward guidance policy in August last year Mr Carney said that the Bank would not consider raising interest rates from their current low of 0.5% until unemployment had fallen to 7% or below.

But with unemployment having fallen faster than expected and the economic recovery "still not secure", the Governor said today that the bank's rate policy would now be determined not just by unemployment but instead by a wider range of indicators including wages, productivity and spare capacity.

Although Mr Carney said that when rates did rise they would do so gradually, investors sent the pound higher on the currency markets as expectations of a rate rise in early 2015 grew.

PwC chief economist, Dr Esmond Birnie said the good news is that rates will stay low; the less good news is that they may not stay low for long: "In his first inflation report back in August 2013 the then new Governor said a hike in rates from the all-time low of 0.5% was off the agenda till unemployment dipped to 7%, and the Bank did not expect that to be achieved until 2016.

"However, as the recovery has speeded up, this now looks likely to be achieved much more quickly, as it's currently sitting at around 7.1%.

"Speaking in Davos last month Mr Carney said the Bank policy of linking interest rates to unemployment needed to ''evolve'' - and that's what's happening today.
"This morning the Bank of England revised its growth estimate for the UK in 2014 to 3.4% - up from 2.8%; however, the Governor also warned that the recovery was not secure and that when rates rose, they would do so only "gradually."

"So, no automatic rate rise when unemployment hits 7%, but they could rise by the spring of 2015 and that saw sterling jump higher on today's money markets.
"It would be sensible for businesses and households in Northern Ireland to do what they can now to prepare for higher interest rates, even if it will be some time before they return to their historic norm of around 5% and the profile of increases will be gradual.

"That said, the improving state of the UK economy allied to market expectations all point to increases in rates."

Commenting on the new forward guidance on interest rates, Katja Hall, CBI Chief Policy Director, added: “The recovery is taking hold, and we’re seeing signs that business investment and trade are starting to make greater contributions to growth. But there is still considerable slack in the economy, so now is not the time to raise interest rates, as the Governor made clear.

“Forward guidance has clearly been effective in influencing companies’ expectations of when interest rates will rise and in cementing their confidence in the recovery.

“The Bank’s new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates. And the Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.”

 

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