News Column

Sterling takes hit as Carney keeps rates low: Bank chief says recovery remains in early stages: Eventual increase will be 'gradual and limited'

May 15, 2014

Angela Monaghan and Larry Elliott

The pound fell against other currencies yesterday after the Bank of England quashed growing City speculation of an early increase in interest rates to rein in the economy.

Interest rates on government gilts also fell as Threadneedle Street used its quarterly snapshot of the economy to say that the UK was not ready for an end to emergency-level borrowing costs.

Mark Carney, the Bank's governor, said there was still spare capacity to use up before interest rates would be increased from their record low of 0.5%, adding that, even when policy was tightened, the action would be "gradual and limited".

"The economy has only just begun to head back to normal," he said. "The exact timing of the first adjustment of Bank rate will be a product of the evolution of the economy. Today is not the day."

The view reflected in the May inflation report was at odds with the market expectation that the first rise in rates would come in the first quarter of 2015.

Rob Wood, chief UK economist at Berenberg, said: "The rate setters are resisting the data strength as much they can. They seem keen to resist a hike this year.

"But, with growth running strong in their forecast, surveys showing no signs of growth slowing and unemployment close to 6% by the end of 2015, delaying that hike beyond the first quarter of 2015 would be untenable, in our view."

The official interest rate has been held at 0.5% since March 2009. Carney said: "The economy has edged closer to the point at which Bank rate will need gradually to rise.

"The exact timing will inevitably be the subject of considerable speculation and interest. The ultimate answer will depend on the evolution of the economy, particularly the degree of slack, the prospects for its absorption, and the broader inflation outlook."

The governor added that the Bank would not start to offload any of the pounds 375bn of gilts it bought under its quantitative easing programme until official interest rates had risen to a level from which they could be "cut materially".

The inflation report forecasts showed the Bank's monetary policy committee still believed there was 1-1.5% of spare capacity in the economy to be used up before rates needed to rise. Inflation is expected to stay close to the 2% target during the forecast period to early 2017.

But the report also highlighted "considerable uncertainty" around the estimate of the amount of slack in the economy, suggesting a range of views among members of the committee.

Carney said the slack was evident in the 1.4 million people who were working part-time because they were unable to find full-time work and a still relatively high unemployment rate.

He said higher interest rates would not be used in the first instance as a tool to cool the housing market if signs of a bubble did begin to emerge. Monetary policy would only be used as "the last line of defence" after the new powers and tools handed to the Bank's financial policy committee (FPC) had been deployed. He also stressed there were limits to what that committee could achieve.

"What we don't have at the FPC and never will have is the ability to control all aspects of the housing market," Carney said.

The Bank left its growth forecast for 2014 unchanged at 3.4%, but revised up its forecast for 2015 to 2.9% from its February forecast of 2.7%. Its forecast for 2016 is unchanged at 2.8%.

It warned there were risks that the recovery could prove to be unsustainable, because productivity and real incomes continue to disappoint or because business investment does not recover as expected.

The Bank's policymakers expected the unemployment rate to fall to 6.7% in the first quarter of 2014, from 6.9% in the three months to February. But data published by the Office for National Statistics yesterday showed the actual jobless rate in the three months to March was 6.8%.

Over the whole forecast period, to early 2017, the Bank said it was expecting unemployment to fall faster than it was predicting in February. By the first quarter of 2017, the jobless rate is expected to be 5.9%, a sharp downgrade from the 6.3% predicted in February.

The Bank said that, although the inflation rate fell to 1.6% in March, it was expected to move closer to the 2% target in the coming months as the falls in petrol prices in the spring of 2013 dropped out of the annual comparison.

Mark Carney

In numbers:


Bank's revised forecast for growth in 2015, which is higher than its February forecast of 2.7%

pounds 375bn

Value of gilts held by Bank, bought during quantitative easing


Forecast for rate of unemployment by the first quarter of 2017, down from February's prediction of 6.3%


Mark Carney, the governor of the Bank of England, says monetary policy is the last line of defence against a housing bubble Photograph: Lefteris Pitarakis/AFP/Getty

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Source: Guardian (UK)

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