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Carney hints BoE will hike rates in early 2015 as UK labour market recovers

Sterling got a bit of a reprieve from its recent decline after Bank of England Governor Mark Carney’s speech on Tuesday to UK trade unions. The central bank chief signaled that UK interest rates could rise as early as the spring of 2015 if the labour market recovers.

In the last BoE policy meeting in August, two out of the nine Monetary Policy Committee members voted for a rate rise, indicating a start in the shift in the trend which used to be a unanimous vote against a rate rise.

While there are no fixed plans for when the BoE will start to tighten policy, the Bank made forecasts last month that showed that if rates started to go up in spring 2015, as markets were predicting at the time, inflation would be on course to settle close to the BoE’s 2 percent target in three years’ time.

Carney noted that while there was no pre-set course for rate hikes, the timing will depend on the data. Some economists even predict the first increase to the benchmark rate as early as February. This is based on the fact that the UK economic recovery has been surprisingly strong since mid-2013, resulting in a drop in the jobless rate.

However Carney also pointed out that apart from the unemployment figures, the BoE will keep a close eye on wage growth. He mentioned that it is expected to lag inflation until mid-2015. The BoE put wage growth more explicitly at the centre of its thinking on when to raise interest rates last month as the slack in the labour market would likely slow wage growth.

Wage growth actually fell in year-on-year terms in the most recent reading, although this reflected how Britain had seen a surge in people seeking work, and there were signs that wages could pick up modestly in the coming months.

The pound bounced against the dollar on Tuesday to 1.6155 following Mark Carney’s speech, after reaching dangerously close to the key 1.6000 level. On Wednesday the pound fell back as it has been under immense pressure recently due to the pro-Scottish Independence campaign gaining ground in the polls.

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