The Bank of England
governor has ruled out an early rise in interest rates, citing falling oil prices and weaker than expected inflation.
Mark Carney told an audience at the University of London that “now is not yet the time to raise interest rates.”
He said that the plummeting oil prices, volatility in China and poor wage growth in the UK had dragged down inflation, therefore delaying the need for a rise in interest rates.
“This wasn’t a surprise to market participants or the wider public. They observed the renewed collapse in oil prices, the volatility in China, and the moderation in growth and wages here at home since the summer and rightly concluded that not enough cumulative progress had been made to warrant tightening monetary policy.”
Carney did not give a commitment on when interest rates would rise from the historic low of 0.5%. Economists have predicted interest rates will not rise until the second half of the year at the very earliest, most likely after the Brexit referendum.
“The world is weaker and UK growth has slowed. Due to the oil price collapse, inflation has fallen further and will likely remain very low for longer,” Carney said.
“This journey doesn’t have a set timetable; only an expected direction of travel.”
The Bank of England decided last week to maintain interest rates at the current level following recent market volatility, with eight of the nine rate setters on the Monetary Policy Committee voting for no change. Only Ian McCafferty voted for a rise to 0.75%.
Carney said that interest rates would not rise until there was stronger growth and inflation was back on track to hit the Bank’s target of 2%.
He pointed out that the Bank would continue to monitor more “buoyant” areas of activity such as buy-to-let mortgages, unsecured consumer credit and commercial real estate.
“More fundamentally, it doesn’t take a genius to recognise that a prolonged period of low and relatively predictable interest rates could encourage the build-up of excessive risks. That’s why the Bank is monitoring risks closely and has taken action where appropriate,” Carney said.
Mike Coady, managing director of deVere Mortgages, said: “I think the earliest we can now expect a rate rise will be in 2017. This is primarily because headline CPI inflation is almost back to zero and because whilst UK GDP growth is steady, current forecasts for wage growth in 2016 of 3.75 per cent look very optimistic. “And when interest rates do eventually rise, there is little reason to expect a return to the rate levels of before the credit crunch.
“The justified expectation that ultra-low interest rates are the new normal and the view that generally house prices across the UK are correctly priced in the current low interest rate environment, will fuel mortgage applications throughout 2016 and for the next few years at least.”
