Economy: Bank of England governor Mark Carney plays down talk of imminent rate rise

Bank of England Governor Mark Carney today appeared to play down the prospect of imminent interest rate rises.

Giving evidence to the Treasury Select Committee, Mr Carney said there seems to be “more spare capacity in the labour market than we previously had thought”.

Although the recovery is entrenched and business investment is rising, earnings growth is not as strong as expected - reducing concerns over inflation.

The comments follow mounting speculation that interest rate rises could be brought forward, with Mr Carney having warned in his Mansion House speech earlier this month that markets are underestimating how long it would be before they move off the historic low of 0.5%.

The Institute of Directors (IoD) this morning called for the first increase to happen this year, potentially as early as the autumn.

But Mr Carney said: “The best collective judgement of the MPC (the bank’s Monetary Policy Committee), which I share, is that there is additional spare capacity in the labour market that can be absorbed further before we would look to begin to normalise interest rates, in other words raise interest rates.

“We are looking to manage monetary policy to achieve the inflation target in a way that supports a durable expansion.

“In doing so what we are looking to do is use up, make sure the economy absorbs is a better way of putting it, what is wasteful spare capacity, spare capacity concentrated in the labour market.”

Mr Carney added: “We think, and this is the guidance we have given, that that will require the start of normalisation of interest rates, in other words increases in interest rates. The exact timing of that will be driven by the data.

“But the most important aspect of the guidance we are giving is that our view is that the increases in rates over the forecast horizon in our best estimation will be limited and gradual.”