Bank of England governor Mark Carney warns of early interest rate rise

Bank of England governor Mark Carney suggested last week that interest rates might rise earlier than expected.

12 June’s Mansion House event was not exactly full of surprises, with much of the content of UK Chancellor George Osborne’s speech published beforehand laying out new laws for the finance sector.

But one statement from Bank of England governor Mark Carney did raise a few eyebrows, after he warned that interest rates may rise earlier than most analysts expect.

Rates have been at a record low of 0.5 per cent for more than five years now, and the emergent economic recovery has had commentators and investors speculating about a potential rise.

At one point, Mr Carney said unemployment would have to drop below seven per cent before a rate rise would be considered. But that was when joblessness was not expected to pass that barrier until early 2016 – and figures published this week show the unemployment is already at 6.6 per cent.

Since then, many predictions have looked towards 2015 for possible rate hikes.

Indeed, the governor said there is still “room to grow” for the economy without causing too much inflationary pressure. However, he said that the time for slow and gradual increases is approaching as the economy gets back on its feet, and a rate rise “could happen sooner than markets currently expect”.

That has fuelled speculation the central bank could potentially be planning an increase in the base rate by the end of this year.

Even so, Mr Carney acknowledged that there are still many challenges to be faced, such as wage pressures – earnings are still rising much more slowly than inflation. The threat of overheating in the housing market is also an issue, along with debt levels that are still relatively high.

House prices are a major concern in many parts of the UK, especially in London and the south-east, and pressure has been mounting on the government to curb the Help to Buy scheme as a result.

If rates do rise before the end of the year, it could contribute to cooling off in the property market. House-builders have fallen on the stock market today in response to the news, as well as new powers that were offered to the Bank of England to rein in high-risk mortgages.

But if, as former chancellor Nigel Lawson claims, a rate rise would indicate that the UK has shaken off the recession at last, it will at least hold some positive news.