The Governor of the Bank of England (BoE), Mark Carney, said yesterday that an interest rate increase is drawing closer due to the UK’s economic performance.
However, Carney also said that UK households are more wary of interest rate rises than in the United States, as many mortgage borrowers here are on standard variable rate (SVR) deals.
Despite inflation reported at 0% in the year to June, as claimed by the Office for National Statistics (ONS) yesterday, Carney believes that the UK is almost ready for the first rate increase since the financial crisis.
He explains: “The point at which interest rates may begin to rise is moving closer with the performance of the economy, consistent growth above trend, a firming in domestic costs, counter-balanced somewhat by disinflation imported from abroad.
“One of the reasons for that is the greater sensitivity of the average UK household to interest rates because mortgages are principally floating rate in the UK and principally fixed in the US.
“Once rates begin to adjust, we expect for those adjustments to be at a gradual pace and to a limited extent. We will learn about the sensitivity as rates begin to adjust, we will watch it very closely.”
Carney also detailed the “new normal” interest rate, which he suggests could be lower than the ordinary 5% seen in the decade before the financial crisis and definitely lower than the peak of around 15% in 1989.
He continues: “I do think there are a variety of factors that mean that the new normal, certainly over the policy horizon over the next three years, is substantially lower than it was previously.
“I see no scenario in which they would move towards historic levels.”1