Carney signals higher rates; return to wage growth

Carney told union leaders borrowing costs would have to rise 'prudently' to keep inflation in check. Picture: Getty
Carney told union leaders borrowing costs would have to rise 'prudently' to keep inflation in check. Picture: Getty
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Interest rates and wages could start rising next year if the UK’s jobs market continues on its path to recovery, Mark Carney said yesterday.

Addressing the annual TUC conference, in Liverpool, the Bank of England governor told union leaders borrowing costs would have to rise “prudently” to keep inflation in check.

Carney – only the third BoE governor to address the event – said: “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer.

“We have no pre-set course, however, the timing will depend on the data.”

Many economists expect the Bank’s monetary policy committee (MPC) to make its first move in February, having kept interest rates at their record low of 0.5 per cent since March 2009.

Nick Dixon, investment director at Edinburgh-based Aegon UK, said: “Carney may have told the TUC that we should get ready for an interest rate rise, but unless a Yes vote in Scotland causes a serious shock to sterling, it’s hard to see this happening before spring next year.

“The Bank will be wary of attracting perceptions of political bias ahead of the election, and the snail’s pace of wage growth, a key concern for the TUC, presents a thorn in the side of those wanting the base rate to increase.”

Carney also reiterated his belief that a currency union between an independent Scotland and the rest of the UK is “incompatible with sovereignty”.

His speech came as official figures showed the UK’s trade deficit hit its highest level for more than two years in July as a rise in exports was more than cancelled out by higher imports, although separate data revealed a faster-than-expected 0.5 per cent rise in industrial output, up from a 0.3 per cent gain in June.

The case for raising borrowing costs has been strengthened by a sharper-than-expected fall in unemployment and muted prices growth – inflation dipped to 1.6 per cent in July, down from 1.9 per cent the previous month, helped by intense competition among supermarkets.

However, Carney said the MPC would keep a close eye on pay deals before deciding to push the button, even though two MPC members – Ian McCafferty and Martin Weale – last month voted in favour of higher borrowing costs because they felt the economic landscape was strong enough to justify a hike.

Carney said: “We will be closely monitoring pay settlements that are bunched around the turn of the year and taking a steer from the pay of new hires as a potential leading indicator of broader pay pressures. There is, as always, uncertainty about the future. But uncertainty does not mean stasis. You can expect interest rates to begin to increase.”

Figures published by the Office for National Statistics last month showed that wages, including bonuses, during the three months to June were 0.2 per cent lower than a year, marking the first fall in five years.

Howard Archer, chief UK and European economist at IHS Global Insight, said Carney’s comments signalled that “most MPC members want to see concrete evidence that pay is starting to pick up before raising interest rates”. He predicted an increase to 0.75 per cent in February.

Sam Hill, an economist with RBC Capital, said some of Carney’s speech suggested a slight strengthening of the message that the MPC will start raising borrowing costs before long, despite fears about weakness in the eurozone, the main destination for British exports.

He added: “There is now a clear default intention to start hiking unless compelling new evidence emerges to convince them otherwise.”