News Column

BoE Carney Says More Slack To Be Absorbed Before Rate Hike

June 24, 2014

LONDON (Alliance News) - Bank of England Governor Mark Carney said there is more spare capacity in the labor market than previously estimated and the economy should absorb the wasteful slack before normalizing interest rate.

"Taken in isolation, the developments on the wage front suggest to me that there has been more spare capacity in the labor market than we previously had thought," the central bank chief told the Treasury Select Committee.

Carney said wage figures were softer than expected and this should be balanced against stronger than expected growth. He underscored that the timing of the rate hike will be driven by data over the coming months.

At the Mansion House speech early this month, Carney said interest rates in the UK could rise sooner than investors expect. He added that policymakers have no pre-set course and the ultimate decision will be data-driven.

At the hearing, Deputy Governor Charles Bean said the markets underestimate the uncertainty around the timing of the first rate hike.

With the economy currently sustaining healthy momentum and the unemployment rate coming down markedly, IHS Global Insight's Chief UK Economist Howard Archer believes that the first interest rate hike is more likely than not to come in late-2014, although it is far from a done deal.

Policymakers were split over the amount of spare capacity existing in the economy. At the hearing, policymaker David Miles said it could be at the upper end of the central bank's estimate of 1-1.5% of GDP. Another member Ian McCafferty did not disagree with the BoE forecast.

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Source: Alliance News

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