The value of the pound soared to a far year high after the Bank of England governor, Mark Carney, sent shockwaves spiralling across the country today with the announcement that the Bank of England could raise interest rates prematurely this year.
During one of the governorís more memorable keynote speeches, Carney identified that an interest rate rise ìcould happen sooner than markets currently expectî, with the announcement directly contributing to sterling rising by 0.32% against the dollar to $1.698, and 0.15% against the Euro at 1.251 Euros.
Economists and market analysts had previously forecasted that the Bank would wait to raise interest rates to at least next year, with many believing that the low inflation rate in the country at present had removed all pressure on policymakers to implement a hike until they believed the time is right.
But Carneyís remarks have captured both politicians and the electorates attention in gripping fashion, with many householdís who possess large mortgages or a high degree of unsecured creditor debts now having to brace themselves for a far more expensive future and larger monthly repayments toward their liabilities.
Nevertheless, BBC economics editor Robert Peston has reiterated the sentiments made by a multitude of economic forecasters today by highlighting that any rate hike instigated this year would be done in a ìsmall and gradualî manner, which is consistent with the reactionary stance that the Bank of England has adopted throughout its tenure.
Meanwhile, market analysts have identified that interest rates had increased by 10 basis points this morning- instantaneously resulting in business borrowing costs rising- whilst future markets had factored in an interest rate rises already within their pricing.
Alan Clarke, economist for both the UK and the Eurozone at Scotiabank, highlighted that Bank governor Carney had a history of making drastic and sudden policy changes.
He said: “Three weeks ago he was dovish, now he is in camp hawk. He’s not a steady Eddie, he’s a bit more volatile.”
Rise will be ëgradual and limitedí
Mr Carney was speaking at a dinner in London where he was quizzed about when the first interest rate rise will take place in the country. The governor accepted that there is ìalready great speculation about the exact timing of the first rate hikeî from its historic low of 0.5% and highlighted that within the policymaker contingency, opinion about when to raise them was ìbecoming more balancedî.
The Governor stressed that at present there is ìno pre-set courseî about when rates should be raised, and identified his belief that the a higher level of the spare capacity within the British economy would be required to be utilised before any action was taken in this regard.
He was also keen to convey the message to consumers and borrowers across the country that the timing of the initial rate hike is far less significant than the speed in which proceeding hikes are made; a fair and valid point that will need to be carefully considered by the Bankís Monetary Policy Committee when the time comes to eventually start raising rates regularly.
“We expect that eventual increases in Bank rate will be gradual and limited,” he said.
This stance of gradualism will be welcome news to British householdís, particularly those with high levels of debt and low/middle incomes who will have to brace themselves for substantially higher monthly repayments on their liabilities when rates do eventually rise.
A steady rise will ensure that people can start to save money away and prepare to make this transition, whilst hopefully also enjoying a raise in their salary as employers begin to feel more confident about their businesses and wage growth picks up in the country. A rate rise should also encourage banks to provide more attractive interest rates on their saving account products, which will make it easier and more attractive for people to put their money away.
In the meantime, it is necessary that people begin to prepare financially for a rate hike this year, because whilst the timing and surprising element of the announcement may be frustrating for many, the reality is that it is better it was revealed now than earlier or later this year.
ëNew powers for BOEí
Speaking directly before the Bank governor, Chancellor of the Exchequer George Osborne unveil plans to grant the Bank of England new powers to stop the property market from crashing.
Osborne identified that these will take the shape of granting them the ability to cap the value of mortgage loans in relation to a borrowerís salary or the cost of the home they are attempting to buy.
And the Chancellor said that if these plans were to be put into action, then the new powers would be granted to the Bankís Financial Policy Committee by the end of this governmentís tenure.
He said: “We saw from the last crisis the dangerous temptations for politicians to leave the punch bowl where it is and keep the party going on for too long.
“I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market.
“I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust.”
Ex-Chancellor Lord Lawson praised Mr Osborne for unveiling the new mortgage cap proposals, arguing that it will go a long way to preventing banks from irresponsibly lending due to a wrong-founded belief that they are ëtoo big to failí.
He added: “I do think it should be very much a last resort, a reserve power. The problem is that clearly the banks shouldn’t lend irresponsibly. Why, then, do they?
“The conquest of the too-big-fail problem is a major unresolved problem and that’s what I would like to see George Osborne focus on.”