Interest Rate Rise Speculation

Short-term interest rates may start rising this year.

Chart showing the Bank of England base rate from 2006-2015

The Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House is one of the City events of the year, with speeches by both the Chancellor of the Exchequer and the Governor of the Bank of England The speeches are often used to reveal new policy initiatives. This time around George Osborne announced that he was giving greater power to the Bank of England to curb mortgage lending to prevent a housing bubble. However, his speech was overshadowed by one short sentence from the Bank’s chief, Mark Carney, on the subject of raising interest rates: “It could happen sooner than markets currently expect.”

Until Mr Carney’s remark, the markets had generally earmarked the first half of 2015 for a move away from 0.5%, with speculation focusing on February or May, when the Bank issues its Quarterly Inflation Report (QIR). Mr Carney’s words have now made November 2014 the favoured month, again coinciding with a QIR.

The markets reacted the following day to the Governor’s words, with yields increasing on two-year government bonds, shares in house builders falling and the pound rising to €1.25 and nearly $1.70. Even so, there is no expectation of a sharp rise in rates – at least not yet. Later in his speech Mr Carney said, “…we expect that eventual increases in bank rate will be gradual and limited.”

Strangely, less than two weeks later Mr Carney hinted to the Treasury Select Committee that a rate rise was not imminent. His comments prompted the Committee’s chairman to remark that the Governor had provided “quite a lot of guidance, not all of it seeming to point in the same direction.”

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