Mark Carney, governor of the Bank of England, has indicated that a rise in interest rates could finally be on the cards after a long period of sustained near-zero rates. Carney suggested that the right time to increase rates could be “at the turn of this year.”
However, this remains far from set in stone. At present it is only a suggested possibility, and Carney warned that any planned rate rise could be altered to reflect any shocks to the economy. Any intention to raise rates will remain highly subject to alteration with regards to both the timing and the size of the increase.
Interest rates are currently at a historic low level of 0.5%, and have been there for the past several years as the UK slowly effects its recovery from the global recession. In a speech given at Lincoln Cathedral, Carney predicted that the next three years will see rates rise steadily until they reach a level of roughly half of the historic average rate. This would place interest rates at the end of this three year period around the 2% mark.
Carney said: “It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.”
Factors such as lower oil prices are playing a role in the expectation that interest rates may finally rise in the foreseeable future. The governor was keen to stress the fact that any rate rise would only take place with careful planning and monitoring of the way it would impact on the everyday finances of UK households.
Some have been surprised by Carney’s predictions about rate rises, come hot on the heels of the news that unemployment in the UK has gone up for the first time in two years. Some experts have suggested this indicates that the bank believes falling unemployment is being hampered by a shortage of skills – a factor that could also account for rising wage inflation.
The Monetary Policy Committee (MPC), Carney said, will most likely “have to feel its way as it goes.” Outgoing member of the MPC David Miles recently said that an increase in rates was “likely to be right” in the near future. Miles has always been one of the MPC’s more cautious members when it comes to rate rises and their possible impact on the UK, so his endorsement has been taken as an indication that rates could indeed rise in the near future.