BANK of England Governor Mark Carney last night warned homeowners that interest rates could rise from their historic low of 0.5 per cent sooner than expected, leading to higher payments for millions of families across the UK.
He said “gradual and limited” increases would be needed as the economic recovery progresses – and that while it would be wrong to start immediately – this was “coming nearer”.
The Canadian former banker signalled the rises could come this year. The consensus among economists until now had been that rates would rise in the first half of 2015.
In his first Mansion House speech to top financiers and business grandees since becoming governor, Mr Carney also signalled that the Bank could take “graduate and proportionate actions” in the weeks to come as a separate measure to cool the threat of an overheating housing market.
Mr Carney described this as the greatest danger to the economy.
Earlier, speaking at the same event, Chancellor George Osborne spoke of “fixing the housing challenge”, and addressing the shortage of homes for families.
But briefly turning to the Scottish referendum, he stated the importance of Edinburgh to the UK as a “world-renowned financial centre”, adding: “And let us hope it remains so … because we are better together”.
Latest figures from the Office for National Statistics found that house prices were rising at an annual rate of 17 per cent in London, and 8 per cent in the UK as a whole.
This has led to fears that an unsustainable bubble is developing in the housing market.
Interest rates have been held at 0.5 per cent since 2009 to try to nurse the UK back to health, but the strength of the recovery has heightened speculation about when they will rise, with City experts pencilling in a hike next spring.
Mr Carney said last night: “It could happen sooner than markets currently expect.”
When the global financial crisis broke in 2008, interest rates were at 5 per cent, and fell month on month to 4.5 per cent, 3 per cent, 2 per cent and 0.5 per cent in March 2009.
Mr Carney said growth had been much stronger and unemployment fallen much more quickly than had been expected.
He said the economy was “unbalanced internally and externally”, pointing to indications that despite a better picture on unemployment there remained too much “wasteful spare capacity”. Wage growth was subdued.
High levels of private sector debt would be “particularly sensitive” to a rate hike, the governor added.
Mr Carney said the need for “vigilance and activism” was most acute in the housing market which was “showing the potential to overheat” – with prices up around 10 per cent a year, approaching early 2007 levels.
He said the Bank was concerned by the threat posed by indebtedness of overextended borrowers and pointed to the vulnerability of the UK in having household debt of 140 per cent of disposable income.
Mr Carney said raising interest rates today would be the wrong response, reiterating that this would only be a “last line of defence”. He added: “Fortunately, we are not up the proverbial creek without a paddle.”