* Carney says rates may rise earlier than markets expect
* Case for rate rise now "more balanced", hinges on data
* Sterling hits one-month high against dollar on comments
* Carney says rate increases would still be gradual
(Adds market and analyst reaction)
By David Milliken
LONDON, June 12 Bank of England Governor Mark
Carney said on Thursday that British interest rates could rise
sooner than financial markets expect, in a surprisingly stark
warning that monetary policy may start to tighten within months.
Speaking alongside British finance minister George Osborne,
Carney also said the central bank would carefully weigh the
merits next week of tackling housing market risks, including an
undesirable loosening in mortgage underwriting standards.
Earlier on Thursday, Osborne said he would grant the BoE new
powers to impose maximum loan-to-value and loan-to-income ratios
on mortgage lending, which Carney welcomed in his speech to
London's financial community.
However, Carney's comments on the possible timing of an
interest rate rise are the most striking. Relatively few
economists had expected rates to increase until the second
quarter of next year.
Carney said Britain's economy still had scope to grow
without pushing up inflation, but that there was little sign yet
of a slowdown in the pace of expansion that the central bank had
pencilled in for the second half of the year.
"There's already great speculation about the exact timing of
the first rate hike and this decision is becoming more
balanced," he said. "It could happen sooner than markets
Sterling gained a cent against the U.S. dollar to hit
a one-month high above $1.693 as traders bet on a rate rise that
some thought could now come before the end of the year.
"Not only did sterling react, but it reacted pretty quickly
and ... much more strongly than people would have considered,"
said Lane Newman, director of foreign exchange at ING Capital
Markets in New York.
RATE RISE NEARING
Last month, a minority of BoE policymakers said the case for
a rate rise was "more balanced" and that interest rates might
need to increase sooner rather than later to ensure they did not
need to rise sharply.
But Carney had until now appeared less keen to contemplate a
rate rise, emphasising that Britain's economy was still a long
way from full strength.
On Thursday, Carney said that more important than the timing
of a first rate rise was that future increases be "gradual and
limited", in part due to high household indebtedness and a drag
on growth from a stronger currency.
He also said that the timing of a rate rise would depend on
incoming data, and that the BoE had no fixed plan on when to
Britain's record current account balance was not an
immediate cause for alarm, he added, but it was only sustainable
to borrow from abroad to fund investment, not consumption.
"Excessive reliance on consumption or non-tradable sectors,
such as housing, all financed by borrowing abroad at an
over-valued exchange rate, would prove only temporarily
satisfying," he said.
Carney said he was also concerned by signs that mortgage
lending standards were becoming looser and set out the case for
early action as insurance against future risks by the BoE's
Financial Policy Committee, which meets next week.
He welcomed Osborne's plan for the BoE to lead a new review
into unethical behaviour in financial markets, with a view to
making a wider range of misconduct subject to criminal
But he also said it was important that the central bank
supported markets where needed. Within the next year, he said,
major British brokers would be able to access BoE facilities on
similar terms to banks.
The BoE would also consider expanding its capacity to lend
in currencies other than sterling, he added.
(Additonal reporting by Sam Forgione in NEW YORK; Editing by
Larry King and Jonathan Oatis)