BoE's Carney says rate rise drawing closer but remains dependent on data

Bank of England Governor Mark Carney said the timing of a first rate hike was drawing closer but that the exact time could not be predicted and will be "data dependent".

Speaking at press conference after the bank's Monetary Policy Committee again held interest rates at their six-year lows, Carney also confirmed that, in light of the muted near term outlook for inflation due to commodity prices, "it wouldn't be surprising if the next few months see negative inflation".

Read more: Bank of England hold interest rate with 8-1 MPC vote as growth forecast upgraded

But, mixed in with some bantering repartee with the assembled hacks, the governor pointed out that forecasts were based on slightly faster rises in rates next year than expected in May. He said these commodity effects would not be news in the 18-24 month horizon in which the MPC can influence inflation and the issue for the committee was that inflation gets back on track in a steady manner.

Read more: BoE inflation report sees 2% target reached by third quarter of 2017

On the strength of sterling, Carney acknowledged that the pound had done "a fair bit of the work in keeping inflation down" and recently the MPC has noticed that less of this effect had been passed through to the consumer than had previously been assumed.

He said this had meant adjustments to forecasts but that while "there's no question that the persistent strength of sterling is having an influence on policy" but that this strength "has to persist".

"Even taking into account the fiscal consolidation we are going to see and the weakness in global demand we see robust private sector growth here and consistent with that is a need to increase interest rates."

Later, Carney strenuously denied suggestions that he said in a speech in July in Lincoln Cathedral that borrowing costs would rise around the turn of the year. He reiterated that the Lincoln speech was his own personal view, while adding that recent job news was far from negative.

On the bank's £375bn of government debt bought as part of quantitative easing, the governor said there would probably have to be "material" rises in interest rates before the BOE would contemplate any sales.

In response to a question about the sustainability of the recovery if consumers were using savings to spend, Carney said: "This is not a debt-fuelled consumer recovery... Households are consuming out of income. There is absolutely a sustainability to that aspect of the recovery particularly as productivity starts to fill in."

Deputy governor Ben Broadbent added that the economic recovery is driven as much by business investment as consumer spending.

Reaction

Against an immediate background of fall in sterling and gilts, IHS Global Insight economist Howard Archer of said: "A summary of our view would be that the first interest rate hike from 0.50% to 0.75% is still most likely to happen in February 2016 – but the risks now looked more skewed to a rate hike occurring later than February rather than earlier."

"The chances of an interest rate hike before the end of 2015 have seemingly receded markedly; indeed, it looks more questionable as to whether the Bank of England will act early on in 2016, Certainly, the markets have taken a largely bearish view of the Bank of England’s latest comments and projections."

Anna Leach, head of economic analysis at the CBI, said: "Despite the committee’s relatively unified decision to keep rates on hold, domestic demand has been stronger than the Bank expected in May.

“The governor’s remarks about inflation shooting through the target in two years’ time imply that rates could rise ahead of current market expectations.

“Meanwhile, the Bank is fairly relaxed about the recent fall in employment and views underlying productivity as a bit stronger than previously thought.”