Mark Carney says interest rate rises likely to be limited — ‘but that’s not a promise’

 
“Expectation”: Mark Carney sparked worries over size of rate rises
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Bank of England governor Mark Carney sparked worries over possible significant increases in interest rates today.

He stressed that any rise is likely to be “gradual” and “limited”, but then added: “That is an expectation — not a promise.”

The Bank’s forecasts suggest that rates will rise to around two and a half or three per cent over the next few years.

But Mr Carney said: “It’s not a guarantee. There are events, there are things that could happen.”

The governor also emphasised the degree of “uncertainty” over a future rise given the almost unprecedented weakness in wage rises.

The Bank’s prediction for earnings growth was today reduced from two-and-a-half per cent just three months ago to one-and-a-quarter.

The dearth in significant pay rises was also laid bare by official figures from the Office for National Statistics which showed wages, including bonuses, falling by 0.2 per cent in the year to June.

This was largely down to bonuses being paid later last year to benefit from the top rate of tax being cut from 50 per cent to 45 per cent.

But even excluding bonuses, wages increased by just 0.6 per cent.

Mr Carney said: “Pay growth has been remarkably weak.”

The jobless total also fell in the quarter to June to 2.08 million, down by 132,000 on January-March and is now at its lowest level since the end of 2009, with an unemployment rate of 6.4 per cent. The claimant count fell in June by 33,000 to just over one million.

On his arrival at the Bank, Mr Carney issued forward guidance that the Monetary Policy Committee would consider raising interest rates once unemployment fell to seven per cent.

Today the Bank further revised down its unemployment forecast, from 6.3  per cent in May for this year to 5.9  per cent.

But it sought to play down suggestions that a rate increase was moving closer, stressing the importance that it is placing on wages growth for this decision.

While the employment figures are a boost to the Coalition, the grim news on earnings is a blow as the lack of pay rises will continue to hit living standards as the general election approaches, with inflation currently at 1.9 per cent.

Economists are divided over whether the first rate rise from the historic low of 0.5 per cent will happen this year or in early 2015.

The City is focusing on the Bank’s forecast for slack in the economy, unused capacity, which was cut from one-and-a-quarter per cent to one per cent today.

“It seems likely that slack is being used up at a faster rate than expected,” said the Bank’s inflation report today.

But it added that slack appeared to have been greater than previously thought.

The mixed messages are likely to leave homeowners no wiser over when the first interest rate rise will happen.

Minutes of last month’s MPC meeting showed that members were divided over whether an early rate increase would derail GDP growth, though they remained unanimous on leaving policy on hold for the time being.

Interest rates have remained on hold since 2009, when they were slashed to 0.5 per cent to help nurse the economy back to health.

They were again held at this month’s MPC meeting though there was speculation that some members might have voted for a rise — which would have been the first split on rates since July 2011.

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