LONDON: Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis, Bank of England Governor Mark Carney has signalled, sending sterling shooting towards a five-year high against the dollar yesterday.
British government bond yields soared, construction stocks tumbled and interest rate futures priced in a first hike by December after Carney said rates could rise sooner than markets had thought — his most hawkish comment to date.
“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Carney said in a speech late on Thursday alongside British Finance Minister George Osborne.
“It could happen sooner than markets currently expect.”
Few economists had expected rates to increase until the second quarter of next year given the central bank’s previous guidance that there was plenty of scope for Britain’s economy to expand further without causing inflation.
A rise in BoE rates this year would be the first since 2007 and put it ahead of both the US Federal Reserve and the European Central Bank. The Fed is still pumping extra stimulus into the US economy while the ECB cut interest rates to record lows last week and said it may not have finished easing.
Carney said Britain’s economy still had room to grow without pushing up inflation, but added that he saw little sign yet of a slowdown in the pace of expansion that the central bank had pencilled in for the second half of the year.
“The change reflects the reality in the economy. It is flying now. Employment is rising at a record pace and we see no sign of economic growth slowing from its current pace,” said Rob Wood, chief UK economist at German bank Berenberg.
An interest rate rise before a national election next May could hurt perceptions of the Conservative-led coalition government by raising mortgage costs and eating into disposable income, which the opposition Labour party says is being eroded by rising prices for everything from energy to transport.
“It is absolutely without question that those people who are right on the edge at the moment will, with a small increase in interest rates, be pushed over the edge,” Conservative lawmaker Mark Garnier said.