Carney stresses the start date for rate hikes is not what matters
Interest rates are headed higher, but what matters is not the start date but rather the path they will follow, which is expected to be gradual, Bank of England Governor Mark Carney told the Birmingham Post.
“What that means though, for this economy to have balance and inflation to get back to two per cent over the next few years is that is going to mean in all likelihood, in our opinion, that interest rates are going to have to increase,” Carney told the newspaper in an interview.
Among the reasons why rate hikes are expected to be more gradual than in the past are the fact that the financial sector is still healing and the on-going fiscal adjustment, the Governor added.
Earlier in the day however, Ian McCafferty, one of the Monetary Policy Committee’s well-known hawks, stressed the fact that there is a good chance that there is less spare capacity in the economy than the BoE's forecasts currently assume.
Precisely for that reason, the sooner Bank Rate begins to rise the easier it will be for the path of rate rises to be gradual.
From those comments Dominic Bryant at BNP Paribas inferred two things. Firstly, “The MPC is not wedded to a particular start date, but it does want to raise rates slowly” and second, “The hawks on the committee do not appear to have lost confidence in their view.”
If wages do pick up as forecast in the BoE’s central scenario, as contained in its latest Inflation Report, that “could lead to the first rate hike coming earlier than the Nov/Dec priced by the market”, Bryant added.