Carney Says BOE Interest-Rate Rises May Start in Early 2016

  • Says decision on rates will come into focus at end of 2015
  • MPC member Forbes says inflation should soon head toward goal

Bank of England Governor Mark Carney said there’s a chance that interest rates may need to increase from a record low in early in 2016 if the economy continues to grow and inflation pressures pick up.

Addressing U.K. lawmakers in London, Carney said the Monetary Policy Committee’s debate on when to raise the benchmark rate from 0.5 percent will become clearer around the turn of the year. If economic expansion is above trend, labor costs and wage growth continue to rise and core inflation accelerates, “then the decision comes into much sharper relief and it may be appropriate to begin withdraw stimulus at that point,” he said.

Carney made the comments as investors count down to the Federal Reserve’s latest policy decision, which may see the first U.S. rate boost in nearly a decade. Traders give a 28 percent chance of an increase in U.S. interest rates, up from as low as 26 percent on Monday but still well below the 50 percent odds before China roiled markets by devaluing the yuan last month.

While the U.K. central bank’s MPC voted this month to keep the key rate unchanged, one member -- Ian McCafferty -- wanted an increase. With the committee focused on when to begin reining in stimulus, policy maker Kristin Forbes said on Wednesday that the U.K. is seeing “solid growth” and rates will probably need to rise in the near future.

The pound rose against the dollar after Carney started speaking and was trading at $1.5493 as of 5:35 p.m. in London, up 1 percent on the day.

Pressure Builds

In a sign of building inflation pressures, data on Wednesday showed wage growth surged to a six-year high in the three months through July. The unemployment rate fell to 5.5 percent to match the lowest since 2008.

One issue for the MPC to consider is that inflation in the U.K. is at zero, far below the central bank’s 2 percent target. While Carney maintains that consumer-price growth will pick up around the turn of the year, he argued Wednesday that domestic demand strength is needed to offset the headwinds to growth and inflation from abroad.

The governor also said the MPC wasn’t making a “pre-commitment” on rates and its decisions would depend on the evolution of the economy. In written testimony to lawmakers, he said the panel will have to “feel its way as it goes” when facing a decision on tightening.

“The prospect of sustained momentum in the U.K. economy and the gradual firming of underlying inflationary pressure will likely put the decision as to when to start the process of gradual monetary policy normalization into sharper relief around the turn of this year,” Carney said in the written report. That said, “the actual path for bank rate will not be mechanical, linear or pre-determined,” he added.

“Carney’s flagging that from January he expects all meetings to be live and there could be a policy change at them, so they could have a rate hike in February,” said Rob Wood, an economist at Bank of America Merrill Lynch and a former BOE official. Carney’s comments on withdrawing stimulus is “moving on from saying it would be appropriate to think about it, to saying it might be appropriate to do it.”

MPC members Forbes, McCafferty and Martin Weale also testified at the Treasury Select Committee hearing.

Labor Market

Forbes said in her testimony that while U.K. inflation should head back toward target “in the not-too-distant future” and policy makers would normally “look through” market volatility, the turmoil in emerging markets means they must monitor developments closely for their domestic implications.

“My reading of the labor-market indicators, however, suggests that there is very little remaining slack -- if any -- in the economy,” she said. “This would normally imply a solid pickup in wages and other production costs. The many factors dampening inflation, from falls in energy and commodity prices to sterling’s appreciation to weak global inflation, have made it harder to assess if this pickup is beginning to occur.”

McCafferty said the risk is that wages will pick up faster then the BOE forecast.

“It’s fair to say that none of us believes that low inflation is going to last,” he said. “I have some worries that we will be slightly above” the inflation target.

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