The Bank of England (BoE) Governor, Mark Carney, has made positive comments about the economy of his country and let it be known he expects to be able to raise interest rates by early next year. The head of the central bank of the United Kingdom made the comments in an interview with the British newspaper, Sunday Times, published today to mark a year since the start of his forward guidance policy on interest rates.
“Wherever the finish line was in the depths of the crisis, we are much more than halfway towards that finish line now,” the BoE governor said. The BoE expects the economy to grow by 3.5% in 2014, the fastest growth rate expected for any of the developed countries this year. Unemployment in the U.K is also expected to fall below 6% by the end of 2014, with a total of 800,000 new jobs added to the economy during the past year. Carney told the newspaper that before interest rates can go up: “We have to have the confidence that real wages are going to be growing sustainably. We don’t have to wait for the fact of that turn to do so.”
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Governor Carney added in the interview that the pound’s 17% rise from its low in March 2013 would not stop an interest rate hike. “Even with . . . that appreciation, inflation gets back to target by the end of the forecast period because slack narrows,” he said. Carney would also be “comfortable” becoming the first central banker of the big four market economies to increase rates after the sharp global cuts following the financial crisis. “Monetary policy is heading in a different direction in at least two of the four. . . We will do what we need to do,” he said.
Another subject that the BoE governor commented on was the British banks getting back to normal operations, when he said they had made “substantial progress,” but warned that some of them might need to raise extra capital to pass the regulator’s stress test which is to be published in the autumn. He defended their use of a loophole in the European cap on bonuses worth more than 100% of salary by paying cash “allowances” to the bank’s top management to get round the cap. The governor said that these allowances, if properly designed, could be “sensible”.
This interview may or may not affect the GBP currency pairs, because the announcements follow the BoE’s previously known plan to start raising interest rates from early next year, but only if wage growth is felt. In early 2015, if indeed traders see that there is a different attitude and an opening gap in the course of the major global central bankers with regards to interest rates and dealing with the recovery, it might lead to increased FX volatility or greater trade volumes if investors try to benefit from opportunities for carry trade or other strategies that might emerge.