Bank of England governor Mark Carney has said interest rates could reach 3 per cent in the next three years as he launched a robust defence of his forward guidance policy.
Last August, Carney said interest rates would not rise until unemployment fell below 7 per cent. After unemployment fell rapidly, he adjusted the threshold in February to a range of 18
At a Treasury select committee hearing this week, MPs argued that forward guidance was “dead and buried”.
Carney told MPs the change had only been made to boost transparency of forecasting and was not related to the drop in unemployment. He said the new measures were entirely down to greater transparency and more accurate economic forecasting.
Conservative MP Brooks Newmark said the changes showed that the forward guidance policy had been traded in for “fuzzy guidance”.
Carney said: “We provided guidance that was well understood. Businesses indicated it gave them greater confidence in the recovery and influenced hiring and spending decisions, contributing to falling unemployment.”
Carney said the path of interest rates was clear and said they could hit 3 per cent within three years.
He said: “Interest rates will rise on a gradual and limited extent. Some Monetary Policy Committee members have put more precise figures on when interest rates will rise over the three-year horizon. Charlie Bean said [an increase of] 2 per cent to 2.5 per cent and I don’t think that is an unreasonable sense to get across.”
Mortgage Centre IFA Fahim Antoniades says: “Given that rates have been low for so long, 3 per cent in three years seems like a quick increase.
“After the next two quarters we will know more about the rate of recovery and the speed of potential rate rises.”