NEW Bank of England governor Mark Carney has hinted that interest rates will stay at rock-bottom levels for the foreseeable future, giving hope to homeowners who have been braced for rising mortgage payments.
The stock market surged but the value of the pound fell after Mr Carney’s debut overseeing the monthly interest rate announcement by the Bank’s monetary policy committee (MPC) .
The FTSE 100 share index rose 3 per cent as the MPC said expectations of a rate rise to come next year were “not warranted”.
The stock market surge was further boosted by European Central Bank chief Mario Draghi, who echoed that message, with an explicit commitment that its 0.5 per cent interest rate would remain the same or lower for “an extended period of time”.
Markets had already “priced in” expectations that interest rates would rise as early as autumn 2014 after a series of reports suggested growth was set to improve in the second quarter of the year.
But the MPC report poured cold water on the upbeat news and warned that recent rises in the cost of government debt “weighed on” the positive indicators.
The Bank’s main report was unremarkable. It said it would hold rates this month at 0.5 per cent and leave the £375 billion quantitative easing programme of pumping money into the economy unchanged.
What surprised the markets was its publication of further guidance explaining some of its decisions. In the past, Bank watchers would have had to wait two weeks to see how the MPC had worked out its decision under the former governor Sir Mervyn King.
Canadian Mr Carney, who arrived this week with a fanfare as great as the burden of expectation placed on him, made the unusual gesture of hinting that interest rates would stay at historic lows, with some commentators estimating they could stay at 0.5 per cent until 2016.
The news was welcome for homeowners and buyers, but less so for holidaymakers, as the value of the pound dropped on fears the Bank’s commitment to “loose” economic policy would stoke inflation. Savers will also lose out, as they face record low interest rates.
Andrew Sentance, a former member of the MPC, was critical of the decision. In a tweet, he wrote: “Inflation is set to rise, and BoE statement pours cold water on rate rises. Pretty dismal signal from MPC to Britain’s savers.”
Sterling fell 1.3 per cent after the Bank’s statement to hit $1.5074, its lowest since 29 May.
But Mr Carney’s comments were welcomed by some analysts, who said the new governor’s more open style of communication could serve to put the UK economy “on firmer ground”.
Scott Corfe, a senior economist at thinktank CEBR, said: “Households may also be more willing to part with their cash if they are assured that mortgage interest payments won’t rise sharply any time soon.
“By removing one element of economic uncertainty, Carney may be able to put the UK economy on firmer ground.”
Mr Carney also impressed some market watchers with the expectation he will introduce “forward guidance” in the Bank’s next update in August, which would be along similar lines to the United States’ central bank, the Federal Reserve.