UK interest rates could rise soon

Mark Carney

Bank of England governor Mark Carney has indicated that UK interest rates could rise by the end of this year.

In a speech he said that he expected rates to rise over the next three years, reaching “about half as high as historical averages”, or about 2%.

Mark Carney
Mark Carney

But he added that shocks to the economy could change the timing and the size of any rate rise reports BBC.

Interest rates have been at 0.5% for six years as the UK economy recovers from the financial crisis.

The Monetary Policy Committee will “have to feel its way as it goes,” Mr Carney said in a speech at Lincoln Cathedral.

He added: “Short term interest rates have averaged around 4.5% since around the Bank’s inception three centuries ago.

“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.

“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year,” he said.

The UK inflation rate is currently at zero but as the effect of lower oil prices feeds through, it is expected to start edging higher.

The governor’s comments come a day after unemployment rose for the first time in two years.

“That suggests the Bank’s interpretation of those statistics is that unemployment falls are now being held back by skills shortages,” said the BBC’s economics editor Robert Peston.

“And those skills shortages are also responsible for rising wage inflation.”

Mr Carney emphasised that the Bank would be monitoring the effect of any rate rise on household balance sheets.