BoE May Raise Rates Sooner Than Expected

In a speech during the 146th annual Trades Union Congress, the Bank of England Governor Mark Carney signaled the benchmark interest rate may start rising by the spring of 2015, as the economic recovery has exceeded all expectations.

Excerpts from the Speech given by Governor Mark Carney at the 146th Annual Trades Union Congress, Liverpool:

The recovery has exceeded all expectations. It has momentum. There has been a sustained and sharp fall in the unemployment rate to 6.4%. Over 800,000 jobs have been created in the past year alone. We expect robust growth of 3½% this year and 3% in 2015. 

With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer. In recent months the judgement about precisely when to raise Bank Rate has become more balanced.

Moreover, the precise timing of the first rate rise is less important than our expectation that, when rates do begin to rise, those increases are likely to be gradual and limited. Rates will go up only as far and as fast as is consistent with price stability as part of a durable expansion, with the maximum sustainable level of employment. 

Actual wage growth, at just 0.6% since a year ago excluding bonuses, is currently very weak. However, there are some leading indicators that point to a modest pick up over coming quarters. 

In other words, there is still slack in the labour market that must be used up, and the recent revisions to the profile of UK output up to 2012 seem unlikely to change that assessment materially. That slack is wasteful. And if it were to remain, inflation would remain below the 2% target. 

The MPC’s current best collective judgement is that, while it has narrowed rapidly, this slack is broadly in the region of 1% of GDP. As this margin of slack continues to narrow, we expect wages to pick up slightly faster than productivity, and unit labour cost growth should increase, consistent with meeting the inflation target. 

However, the MPC expects it will take the better part of three years for this to happen.

With inflation at 1.6%, continuing downward pressure from the appreciation of sterling, and with slack remaining, the current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses. Our latest forecasts show that, if interest rates were to follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2% by the end of the forecast and a further 1.2 million jobs would have been created.

BoE May Raise Rates Sooner Than Expected

BoE | Joana Taborda |
9/9/2014 1:08:39 PM