Financial News

  • 15 May 2014, 13:18

Interest Rate To Remain Low For 'Some Time'

The Bank of England says it is in no rush to raise the base rate of interest, easing home-owners' fears of mortgage costs rising this year.

During its latest Inflation Report briefing, the Bank's governor Mark Carney moved to reassure borrowers that bank rate - used by lenders to help determine mortgage costs - would be likely to remain at its record low of 0.5% for "some time".

He would not comment on current market expectations for the bank to act in the second quarter of 2015, but said there was sufficient slack in the economy to erase the prospect of a rise in the short term.

The remarks led economists to speculate that the bank could hold off on a rate rise even until after the next election - due in 12 months' time.

Mr Carney said the bank would be taking a hard look at mortgage affordability amid concern that wages are failing to rise at a pace strong enough to support rising rates.

He told reporters the bank's Financial Policy Committee (FPC), which examines risks to financial stability, will not target house prices but tackle risks to stability from the housing market amid fears of a growing bubble across London.

Mr Carney said that the bank could not act regionally - only on a national basis.

He spoke hours after Sky's Economics Editor Ed Conway reported that the house price affordability gap between local authority areas had reached unprecedented levels.

In addition to his comments around rates and the housing market, Mr Carney also confirmed an MPC upgrade to its UK growth forecast for next year from 2.7% to 2.9%, but it left its prediction for GDP growth this year at 3.4%.

The bank revised its expectations on unemployment, predicting that the rate would fall to 5.9% in two years.

Official figures released earlier on Wednesday showed the rate stood at 6.8% in the quarter to March following record quarterly employment growth.

On the prospect of a rate rise Mr Carney said: "As time has moved on and the recovery has been sustained, the economy has edged closer to the point at which Bank rate will need gradually to rise.

"The exact timing will inevitably be the subject of considerable speculation and interest."

He said the answer would depend on the progress of the economy and in particular the measure of "slack" or spare capacity and the inflation outlook.

"Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, not the ultimate goal.

"The real tournament is just beginning and its prize is a strong, sustained and balanced growth."

John Cridland, the CBI's director-general, reacted by warning that growth was not back to normal.

He said: "Housing remains a concern and it is reassuring that the FPC has the mandate and a range of tools available to keep the housing market in check.

"It was good to hear the governor confirm that a decision to increase interest rates would be based on the sustained strength of the wider economy, and there is still some way to go to reduce slack and boost productivity and wages".

Advertisement