UPDATE 1-BoE's Carney says interest rates won't return to "old normal" levels

Fri Jun 27, 2014 4:30am EDT

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LONDON, June 27 (Reuters) - British interest rates are unlikely to return to levels seen as normal before the financial crisis because the economy is still vulnerable, Bank of England Governor Mark Carney said in an interview broadcast on Friday.

Speaking a day after the British central bank imposed its first limits on how much people can borrow to buy a home, Carney said interest rates were unlikely to return to their "old normal" pre-crisis average of around 5 percent.

Market expectations that rates will be around 2.5 percent in three years as "not inconsistent" with the economy returning to form, Carney told BBC radio's Today programme.

"The old normal (interest rate) is not likely to be the new normal," he said.

"Things have changed. Households have a lot of debt, the government has been consolidating its financial position, Europe is weak, the pound is strong, and the financial system has been fundamentally changed."

Carney also pointed to the Bank's projections for interest rates, published in May, that show interest rates nearing 2.5 percent in 2017.

"But I'm not giving you a guarantee on that, I'm giving you direction," he said.

The Bank of England has kept interest rates at a record low 0.5 percent for more than five years.

Carney repeated his message that the time will come to raise interest rates, and that the BoE intends to hike them in a "limited and gradual" fashion.

Economists polled by Reuters expect the first interest rate hike to come in the first quarter of 2015, while financial markets currently price it in at around the turn of the year.

On Thursday the BoE moved to stem increasing levels of debt and rapidly rising house prices by announcing curbs on mortgage lending.

(Reporting by Andy Bruce; Editing by Catherine Evans)

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