Base Rate May Rise Before Start of 2015, Governor States

The Bank of England's Monetary Policy Committee (MPC) may start raising the base rate of interest before the end of this year, governor Mark Carney has said.

In a speech at the Lord Mayor's Banquet for Bankers and Merchants of the City of London in the Mansion House yesterday (June 12th), he said: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced.

"It could happen sooner than markets currently expect."

The comments reflect the fact that the economy has improved faster than was imagined a year ago, Mr Carney noted, when the Mansion House speech was delivered by his predecessor Sir Mervyn King. This included both faster growth in gross domestic product and a speedier fall in unemployment than had been anticipated.

While SMEs may be keen to get an idea of when their borrowing costs will rise, the pace at which they do so is also important - a point made by Mr Carney in his speech.

He noted: "The MPC has rightly stressed that the timing of the first Bank Rate increase is less important than the path thereafter - that is, the degree and pace of increases after they start." 

Such increases will be "gradual and limited," the governor observed.

The interest rate policy pursued by the Bank in the three years since the financial crisis saw rates varying between four and 5.75 per cent, with the base rate still at five per cent until October 2008. Between then and March 2009 the rate was slashed for six months in succession, dropping to the lowest rate in the history of the central bank.

As the economy has recovered, the MPC has considered how to manage market expectations regarding when rates would start to rise again. Its initial response was to issue forward guidance linked to the unemployment rate, but this was based around an assumption that joblessness would not fall below seven per cent - the rate at which the MPC was likely to consider a change - until 2015.

With the improvement in the employment market defying expectations, the Bank abandoned this guidance late last year.

Expert Opinion

The fact that this move is being considered shows that the economy has experienced a marked improvement in the recent months. <br/> <br/>"Other studies have demonstrated this, with many small businesses revealing plans to consider how to expand their operations – from building their workforce to examining opportunities abroad and other prospects. <br/> <br/>"Developments on a potential base rate rise will be following closely by the business community and it will be interesting to see how matters develop in the coming months." Steven Beahan - Partner