LONDON (Reuters) - The Bank of England may start to raise interest rates next spring if the labour market continues to recover from the financial crisis, Governor Mark Carney said on Tuesday.
Carney said forecasts made by the Bank last month showed that if rates started to go up in spring 2015, as markets were predicting at the time, inflation would be on course to settle close to the BoE’s 2 percent target in three years’ time.
“With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer,” Carney said in a speech to representatives of trade unions.
Britain’s economy has staged a surprisingly strong recovery since mid-2013, bringing down unemployment sharply and raising the prospect of the Bank of England increasing borrowing costs before the U.S. Federal Reserve.
Most economists expect British interest rates to start to rise around February, but Carney stressed there was no concrete timetable.
“We have no pre-set course, however; the timing will depend on the data,” he said in the speech.
Sterling briefly jumped before falling back and British government bond prices pared some of their losses.
Sam Hill, an economist with RBC Capital, said some of Carney’s comments suggested a slight strengthening of the message that borrowing costs will start to rise before long, despite concerns about weakness in the euro zone, the main destination for British exports.
“There is now a clear default intention to start hiking unless compelling new evidence emerges to convince them otherwise,” he wrote in a note to clients.
But Alan Clarke at Scotiabank said the speech could be read as suggesting the Bank was prepared to wait longer before raising interest rates, given that inflation pressures have diminished more than it was expecting in August.
Carney said wage growth in Britain had been very weak - it actually fell in year-on-year terms in the most recent reading. But this reflected how the country had seen a surge in people seeking work, and there were signs that wages could pick up modestly in the coming months, Carney added.
The Bank of England would watch closely how pay settlements turn out at the turn of the year and “take a steer” from growth in starting salaries for people starting new jobs, he said.
This would be consistent with most economists’ expectations that the BoE will not raise interest rates before February, despite the fact that two of the BoE’s nine policymakers voted for a rate rise in August.
The BoE put wage growth more explicitly at the centre of its thinking on when to raise interest rates last month.
Carney reiterated the view of the BoE’s policymakers that the amount of slack in the labour market was equivalent to around 1 percent of Britain’s economic output, and said he did not expect wages to rise faster than inflation until the middle of next year.
“In other words, there is still slack in the labour market that must be used up,” Carney said, adding that recent upgrades to estimates of British economic growth to 2012 were unlikely to change that view materially.
But Carney also said the BoE would not allow inflation risks to build.
“The current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses,” he said in the speech.
Carney repeated the BoE’s message that when the time comes for interest rates to go up, they will increase only gradually and probably to a level below the pre-financial crisis average.
Additional reporting by David Milliken; editing by Jeremy Gaunt