Interest rate warning sends pound surging

Bank of England governor Mark Carney surprises City with Mansion House speech, leading to expectations of early rate rise

The pound has risen sharply after the governor of the Bank of England warned interest rates could increase this year.

Sterling jumped 1.5 cents against the US dollar to $1.6987 – close to a five-year high – after Mark Carney's comments in his Mansion House speech took City analysts by surprise.

Carney said on Thursday night: "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than markets currently expect."

The City had expected the first increase in official borrowing costs since 2007 to take place early next year after more than five years at a record low of 0.5%.

The governor's warning hit the share prices of housebuilders and other property companies. Shares in Persimmon and Barratt Developments both fell by more than 4% and led the FTSE 100 down. British Land and Land Securities, the commercial property developers, each dropped about 3%. Rightmove, the online estate agent, fell 1.5%.

UK 10-year gilt yields were four basis points higher after Carney's speech at 2.74%, though US and German government bond yields were also up.

The Bank has spent most of Carney's first year in office trying to persuade markets that rates would rise later than forecast. Carney has said repeatedly that keeping rates low would help ensure the economic recovery took hold.

But with unemployment falling and the London property market in danger of overheating, the Bank's previously unanimous monetary policy committee (MPC) has shown signs of splitting over the timing of the first rise. MPC member Martin Weale said last month that rates would start to rise "sooner rather than later" so the Bank could ease borrowing costs up instead of imposing a sharp rise.

Rob Wood, chief UK economist at Berenberg Bank, said Carney's words marked a shift and predicted that the first rate rise would come in November.

Wood, a former economist at the Bank of England, said: "The message was caveated, but Carney would have been well aware of the probable impact of his words. He would not have chosen the words lightly, which makes them significant. The change in tone was sensible, in our view. Record low interest rates are increasingly unnecessary."

The price of oil rose to its highest since September owing to fears that violence in Iraq could disrupt supplies from one of the world's biggest producers. The Brent Crude price rose 0.6% to $113.68 after Barack Obama said the US was looking at all options to help the Baghdad government repel Sunni jihadists who have seized three of the country's biggest cities.

A prolonged spike in the oil price could also put upward pressure on interest rates by increasing the cost of energy and other goods.


Sean Farrell

The GuardianTramp

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