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BoE rate rise may be soon

June 13, 2014

Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis, Bank of England Governor Mark Carney has signalled, sending sterling shooting towards a five-year high against the dollar on Friday.

British government bond yields soared, construction stocks tumbled and interest rate futures priced in a first hike by December after Carney said rates could rise sooner than markets had thought his most hawkish comment to date.

"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," Carney said in a speech late on Thursday alongside British finance minister George Osborne.

"It could happen sooner than markets currently expect."

Few economists had expected rates to increase until the second quarter of next year given the central bank's previous guidance that there was plenty of scope for Britain's economy to expand further without causing inflation.

A rise in BoE rates this year would be the first since 2007 and put it ahead of both the US Federal Reserve and the European Central Bank. The Fed is still pumping extra stimulus into the US economy while the ECB cut interest rates to record lows last week and said it may not have finished easing.

Carney said Britain's economy still had room to grow without pushing up inflation, but added that he saw little sign yet of a slowdown in the pace of expansion that the central bank had pencilled in for the second half of the year.

"The change reflects the reality in the economy. It is flying now. Employment is rising at a record pace and we see no sign of economic growth slowing from its current pace," said Rob Wood, chief UK economist at German bank Berenberg.

The pound hit a 5-1/2 year high against a trade-weighted basket of currencies and was just a fraction below an almost five-year high against the dollar. Short sterling rate futures fell, pricing in the first hike by December. The interbank interest rate curve also pointed to a rate rise by the end of the year, compared with the first quarter of 2015 on Thursday.

Osborne, meanwhile, said he would grant the BoE new powers to impose maximum loan-to-value and loan-to-income ratios on mortgage lending, a step which Carney welcomed.

AA+ bond grade affirmed

Meanwhile, The UK's government bond grade was affirmed at AA+, the second-highest level, by Fitch Ratings, which cited robust gross-domestic-product growth and an improving labour market.

"Favourable macroeconomic trends, including strong GDP growth, falling unemployment and inflation close to the two per cent target, have continued in the UK economy since our last review in December 2013," Fitch said in a statement on Friday. The nation's credit outlook was affirmed as stable.

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Source: Khaleej Times (United Arab Emirates)

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