INTEREST rates could rise ahead of the next general election if the economy continues to gain traction, the governor of the Bank of England said yesterday.
Mark Carney admitted that a hike in the cost of borrowing was likely to prove unpopular, but said a rise should be seen as a sign of a return to normality “after some very difficult years”.
Interest rates have been at their historic low of 0.5 per cent for five years now and any upward push would hit the pockets of millions of voters with mortgages and borrowings.
Asked, as part of an interview with a newspaper, if he would rule out such a hike before next May’s general election, he said: “No, absolutely not.”
The Bank’s rate-setting committee has abandoned a policy linking the cost of borrowing to unemployment, but has indicated that it will instead be based on a more complex framework linking it to the output gap in the economy.
Most economists expect an increase to take place at some point during the first half of 2015.
Yesterday’s comments from the governor came as the European Central Bank left its main interest rate unchanged at 0.25 per cent, despite evidence that the eurozone economy remains weak, with inflation continuing to fall and unemployment stuck near a record high.
Carney, right, cautioned that any rise in UK rates would be gradual and added that despite unemployment falling more quickly than expected, there remained “slack” in the labour market “right across the country”, more of which needed to be used up before any hike. He said the recovery in the economy had been “uneven” and needed to be seen across the UK.
His remarks on interest rates come after Martin Weale, a fellow member of the monetary policy committee, indicated that a rise in the cost of borrowing was likely next spring, and appeared to suggest it would come before the general election.
Carney also warned bankers that they needed to be more professional to repair their shattered image after the financial crisis.
“I’m not sure bankers need to wear sackcloth, but nor should they jump back into wearing Gucci suits,” he said. “There needs to be an improvement in terms of banker conduct. Banking needs to be treated more as a profession.”
Meanwhile, a report by the Bank of England has suggested that lenders expect the availability of mortgages and business loans to pick up markedly in the second quarter of this year.
The Bank’s quarterly credit conditions survey revealed that demand for secured lending by households – essentially mortgages – rose in the first quarter, although the pace of growth eased from a survey record high at the end of 2013.
Howard Archer, chief UK and European economist at forecasting consultancy IHS Global Insight, described the survey’s findings as “encouraging”.