Carney sets out how and when rates will rise

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Interest rates could rise as early as the turn of the year, Bank of England governor Mark Carney has hinted.

In a speech yesterday, Carney said rates will increase slowly and gradually from their current level of 0.5 per cent to around 2.25 per cent.

He said the ‘equilibrium’ rate of interest – the rate needed to keep the economy at its potential and inflation on target – will be lower than the historical average interest rate of 4.5 per cent.

Carney said: “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 historical 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 increase in rates will not be “linear or pre-determined”.

Carney said the Monetary policy committee will consider three major factors when deciding when and how to raise rates: the pace of economic activity, household debt and core inflation.

He said: “Shocks to the economy could easily adjust the timing and magnitude of interest rate increases.

“Given these considerations, the MPC will have to feel its way as it goes, monitoring a wide range of indicators and adjusting the pace and degree of Bank rate as it learns about the effects of higher interest rates on the economy.”