Borrowers warned of imminent rise in UK interest rates
BANK of England boss Mark Carney has braced borrowers for further and faster interest rate hikes after stronger-than-expected growth in the economy.
It comes after policymakers on the Bank's nine-strong Monetary Policy Committee (MPC) voted unanimously to leave rates unchanged at 0.5 per cent yesterday.
Mr Carney has warned that rates will need to rise sooner and by more than expected at the time of the Bank's last forecasts in November to get inflation back to target.
It leaves the door open to a potential rate hike as soon as May, with markets also now pencilling in more than three hikes within three years.
Mr Carney refused to be drawn on the exact timing of future hikes, but said they would need to rise "somewhat earlier and by a somewhat greater degree" than expected in November.
He stressed however that rises would be limited and gradual, assuring borrowers the UK will not return to interest rate cycles "experienced in the past", when historically there were two rises a quarter and borrowing costs stood at 5 per cent on average.
"We are not talking about going back to those levels or that historic pace," he said.
Financial markets believe there is a 50/50 chance of rates being raised to 0.75 per cent in May, when the Bank's next set of forecasts are due, with at least two more by the end of 2020, taking the bank rate to 1.25 per cent.
The Bank said the economy had performed better than expected and upped its growth forecasts to 1.8 per cent in 2018, from 1.6 per cent predicted in November.
Average annual growth is set to ease back to 1.7 per cent in 2019 - in line with its November forecast - and remain at 1.7 per cent in 2020.
There was little cheer for financially squeezed households as its quarterly report showed rising oil prices would keep inflation above 3 per cent in the short-term and see it take longer to return to target.
The Bank also cautioned that Brexit remained the biggest threat to growth, while households continue to be squeezed by poor wage growth and falling inflation.
Economists have predicted at least one interest rate this year.
Andrew Sentance, senior economic adviser at PwC, said: "It is no surprise to see interest rates being held this month at 0.5 per cent. But it is still likely that they will rise later this year, with at least one quarter point rise - and possibly more - during 2018."
James Smith, an economist at ING, added: "We now expect the Bank of England to increase rates at the May meeting. And given the Bank's suggestion that rates will need to rise by a 'greater extent', a second hike in November certainly can't be ruled out."