Carney: Interest rates set to rise
INTEREST rates could finally start to rise by the end of the year, the Governor of the Bank of England signalled last night.
Higher interest rates will provide long-awaited relief to savers, who have seen their returns shrink in the wake of the financial crisis. But they will increase pressure on borrowers, who will have to pay more for mortgages and credit card bills.
The increase in interest rates could also cool the housing market.
The Bank of England base rate, used as the starting point for banks’ and building societies’ saving and borrowing rates, is expected to rise slowly over the next few years, said Mark Carney.
Currently at 0.5 per cent, the record low at which it has been kept for the past six years, it will peak around 2.5 per cent, he predicted.
“The need for Bank Rate to rise reflects the momentum in the economy and a gradual firming of underlying inflationary pressures,” he said, in a speech in Lincoln. “The decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”
Mr Carney stressed that any action by the Bank to cool the economy by raising interest rates, which could in turn bring down inflation, would require about 18 months to take effect.
However, he said that rate rises were likely to be “limited and gradual”.
James Daley, the founder of the analysts Fairer Finance, said: “Any rate rise will bring welcome respite to millions of savers who have suffered rock-bottom returns for more than six years.
“But savers should temper their excitement, as interest rates will have to rise very slowly or many heavily indebted households will face a great squeeze that could pull the rug out from under the fragile economic recovery.” David Hollingworth, of mortgage brokerage London & Country, said: “This is another reminder to borrowers not to become complacent; rates can’t remain at their record lows forever.”
Last night the pound spiked against the dollar and euro – against which it hit 1.436, its highest level in eight years – as Mr Carney delivered his speech. He said the nine policymakers at the Bank who set interest rates would adopt a “feel its way as it goes” approach to tightening policy that would depend entirely on the data. Rates were likely to “rise to a level in the medium term that is perhaps about half as high” as the historic average of 4.5 per cent, he said, but would not be “mechanical”, “linear” or “predetermined”.
Mr Carney pointed out that the recent strength of the pound and high levels of personal debt in the UK warranted the slow and steady approach.
The Office for Budget Responsibility, the Government’s fiscal watchdog, expects household debt to rise above its pre-crisis peak of 165 per cent of income by the start of the next decade.
David Miles, another Bank of England policymaker, said earlier this week that it would be a “bad mistake” if policymakers waited too long to raise interest rates. Mr Carney told MPs this week that UK interest rates were expected to rise at around half the pace of the US rate, partly because British households were more exposed to the impact of higher rates.
Bank data show the proportion of people taking out fixed-rate mortgages when buying a home has grown to 77 per cent of new UK lending, compared with 45.9 per cent at the beginning of 2008. But 57 per cent of outstanding balances are tied to a floating rate. House prices hit a record high of £181,619 last month as property owners and buyers responded to the Conservative election win by borrowing at the fastest rate in seven years.