LONDON (Reuters) - Bank of England Governor Mark Carney pushed back expectations in markets for when the central bank might start raising interest rates on Thursday, saying it would consider the effects of low inflation from outside Britain and the strength of sterling.
Carney said on Thursday that the Bank expected to return inflation to target within two years, even though it fell to 0.3 percent in January, and to make limited and gradual increases in rates over the next three years, echoing recent comments.
"The pace and degree of these increases will be affected by a variety of factors, including the evolution of foreign prices and our exchange rate, as well as domestic cost pressures," Carney said in a speech at a manufacturing research centre in northern England.
Sterling hit a seven-year high against the euro on Wednesday, although it has suffered heavy losses against the dollar recently.
British government bond prices rose sharply in response to Carney's comments and investors pulled back their expectations for rate hikes in the years ahead.
Carney said policymakers could be expected to look through one-off shocks, but said it may be appropriate to take persistent deflationary forces from abroad into account.
That could arise from a combination of continued low foreign inflation and the protracted effects of sterling's strength on consumer prices, Carney said.
Reporting by Andy Bruce and William Schomberg, additional reporting by London bureau