Interest rates could rise ‘sooner than markets currently expect’, according to the governor of the Bank of England, Mark Carney.
Speaking on Thursday 12 June at the Mansion House Bankers and Merchants Dinner in London, Mr Carney said that ‘eventual increases’ will be ‘gradual and limited’.
Mr Carney’s comments have led some economists to predict that interest rates could rise as early as before the end of the year, although general consensus is that this will not happen until the first half of 2015.
Nonetheless, the hint of a rate rise was enough to raise the pound to its highest rate in 18 months.
Sterling increased by 0.32% against the dollar to $1.698, and against the euro it was up 0.15% at 1.251 euros, meaning consumers could potentially receive more value for money abroad.
Low interest rates
Since March 2009, interest rates have been at 0.5% – the lowest it has been for centuries – as part of a number of measures to rescue the British financial system following the 2007 crisis.
The result for consumers has been lower interest rates on credit cards, mortgages and loans – and on a negative note, savings rates are also much lower.
Thus, interest rate rises could increase the cost of borrowing for consumers, especially for those paying off large debts over longer periods.
However, with house prices increasing, interest rates rising could be one measure used to slow down demand.
The think tank, Resolution Foundation, believes that many people risk being trapped in ‘unaffordable’ borrowing if interest rates rise, as many economists have predicted, to 3% by 2018.
Matthew Whittaker from Resolution Foundation said: “Many borrowers have enjoyed spectacular savings over recent years, with mortgage rates falling to historic lows, and most will be able to ride the tide of gradually rising interest rates. But for around one-in-four, even modest rate rises could create financial difficulties.”
While consumers will have mixed feelings about any rise in interest rates, Dr Adam Marshall at the British Chambers of Commerce, said that businesses needed to be confident that they will be working in a ‘low interest rate environment’.
“While Mark Carney is right to say that the ‘timing of Britain’s first interest rate rise is less important than the path thereafter’, we would urge the Monetary Policy Committee not to jump the gun,” he said.