Bank of England Governor Mark Carney said officials may raise the key interest rate before workers’ pay increases, according to a Sunday Times interview.
“We have to have the confidence that prospective real wages are going to be growing sustainably” before raising borrowing costs, he said. “We don’t have to wait for the fact of that turn to raise them.”
The BOE has held the key rate at a record-low 0.5 percent since March 2009 even as the International Monetary Fund projects the U.K. to have the fastest economic expansion among Group of Seven nations this year. At the same time, the central bank last week lowered its forecast for wage growth and said it will place more weight on earnings as it assesses policy.
Under Carney, the BOE has shifted its guidance on interest rates from unemployment to spare capacity and now wages. Pay fell an annual 0.2 percent in the second quarter, the first decline since 2009, according to the Office for National Statistics.
Carney said in the interview that officials are “united” on the need for rate increases to be limited and gradual, to accommodate the strain that higher borrowing costs will place on households.
“There are big pockets” of households “who will be very sensitive to interest-rate increases when they begin, so it makes sense to be gradual,” he said.
The bank raised its growth projections last week and narrowed its estimate of slack remaining in the economy, while saying inflation would remain below its 2 percent goal through its forecast period.
The BOE’s price projections are compatible with the pound’s appreciation because of the narrowing of slack, according to Carney. Sterling has risen almost 7 percent against the dollar over the past year.
The governor also said banks have made “substantial progress” in returning to normal. Pay practices that effectively circumvent a European Union bonus cap could be “sensible” if properly designed, the Sunday Times reported him as saying.
“The expansion is proceeding, momentum is more assured,” and “the very fact we have had consistent quarters of growth in line with, or slightly better than, our forecasts shows that,” he said. “Wherever the finish line was in the depths of the crisis, we are much more than halfway toward that finish line now.”
The governor said the BOE is ready to be the first of the four biggest central banks to raise interest rates. The European Central Bank cut its benchmark rate in June, while the U.S. Federal Reserve and Bank of Japan are still adding stimulus.
“Monetary policy is heading in a different direction in at least two of the four” regions, and “we will do what we need to do,” he said. “But we are comfortable taking the necessary policy decisions.”
Minutes of the Monetary Policy Committee’s July meeting to be published on Aug. 20 will show whether unanimity under on rates has ended. Since the former head of the Canadian central bank joined the BOE last year, no member of the MPC has dissented on an interest-rate vote.
“It is entirely healthy for people to have different views on the committee and it is to be expected at a time when decisions become more finely balanced,” Carney said.