Speaking in Glasgow at a business conference ahead of the Commonwealth Games, the Canadian said next month’s inflation report will be key to deciding a timetable for rate rises.
Carney said: “As the economy normalises, bank rate will need to start to rise in order to achieve the inflation target. But the MPC has no pre-set course and the timing of any increases in interest rates will be determined by the data.
“In this regard, the monetary policy committee is balancing the implications for inflation of hard evidence of sustained economic momentum against conflicting signals over the degree of slack in the labour market.”
He said that while some indicators such as wages have recently suggested that Britain had more willing workers than had previously been thought, it is also the case that spare capacity is being used up a bit more rapidly than the Bank had expected.
“A key judgment for the MPC is when and to what extent these developments will translate into real wage growth, and in turn that wage growth into price pressures,” he added. “Next month’s inflation report provides the next opportunity to update our thinking on these important questions.”
The closely-monitored report gives members of the MPC a detailed overview of price pressures with forecasts stretching into the medium term. Carney noted that, even over the medium term, interest rates should remain lower than has previously been the norm due to weaknesses in the global economy.
Referencing Scottish victories at previous Commonwealth Games, such as sprinter Allan Wells, he said: “The UK economy has also had some sprint success of late and is the current holder of the ‘fastest growing advanced economy in the world’ title. That is welcome after some difficult years, but what really matters is what comes next.
“The bigger prize is winning the economic marathon by achieving a durable expansion. We must replicate the sprint success of Wells over longer distances, taking our lead from Scotland’s Liz McColgan, who memorably won gold in the 10,000 metres last time the Games were held in Scotland, before going on to win the New York, Tokyo and London marathons.”
He avoided the constitutional debate and said that by “we” he meant “the UK, the Commonwealth and the world – can win the economic marathon”.
The governor was speaking shortly after minutes of the last MPC meeting showed the debate over a rate hike hotting up. Policymakers voted unanimously to hold rates but showed increased discussion over the timing of changes.
The minutes noted: “Members had no preset timing for the first increase in bank rate, which would be driven by the data. Against this backdrop, the committee agreed that no increase was warranted at this meeting, although for some members the decision had become more balanced in the past few months than earlier in the year.”
Philip Shaw, at Investec, found it surprising that the minutes did not contain any hints from individuals that they were on the brink of voting for tighter policy. He said concentrating on wage growth appeared to be a new nuance of the MPC’s forward guidance, as the current lack of inflationary demands from workers was allowing rate-setters to sit on their hands.
But he added: “The August inflation report should be a watershed as one or more individuals may start to vote for higher interest rates and markets will consider that a rate increase is becoming a more realistic possibility.”