* Carney says rates may rise earlier than markets expect
* Sterling nears five-year high against dollar on comments
* Carney says rate increases would still be gradual
* Reuters poll shows UK rate rise likely in Q1 2015
* S&P revises UK AAA rating outlook up to stable
(Adds Standard & Poor's rating outlook upgrade)
By David Milliken
LONDON, June 13 Britain could become the first
major economy to tighten monetary policy since the 2008
financial crisis, Bank of England Governor Mark Carney has
signalled, sending sterling shooting towards a five-year high
against the dollar on Friday.
British government bond yields soared, construction stocks
tumbled and interest rate futures priced in a first hike by
December after Carney said rates could rise sooner than markets
had thought - his most hawkish comment to date.
"There's already great speculation about the exact timing of
the first rate hike and this decision is becoming more
balanced," Carney said in a speech late on Thursday alongside
British finance minister George Osborne.
"It could happen sooner than markets currently expect."
Few economists had expected rates to increase until the
second quarter of next year given the central bank's previous
guidance that there was plenty of scope for Britain's economy to
expand further without causing inflation.
A Reuters poll of economists on Friday showed most expect a
rate rise will come by March 2015, three months earlier than a
previous poll published two weeks ago. Only a minority expect a
rate rise before the end of this year.
A rise in BoE rates this year would be the first since 2007
and put it ahead of both the U.S. Federal Reserve and the
European Central Bank. The Fed is still pumping extra stimulus
into the U.S. economy while the ECB cut interest rates to record
lows last week and said it may not have finished easing.
Carney said Britain's economy still had room to grow without
pushing up inflation, but added that he saw 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.
"The change reflects the reality in the economy. It is
flying now. Employment is rising at a record pace and we see no
sign of economic growth slowing from its current pace," said Rob
Wood, chief UK economist at German bank Berenberg.
The pound hit a 5-1/2 year high against a trade-weighted
basket of currencies and came with in a hair's breadth of
its highest in almost five years against the dollar.
Short sterling rate futures fell <0#FSS:>, pricing in the
first hike by December. The interbank interest rate curve
(SONIA) also pointed to a rate rise by year's end.
On Thursday it had pointed to a rise in the first quarter of
Rating's agency Standard & Poor's upgraded its outlook for
Britain's triple-A credit rating to stable from negative late on
Friday, although rivals Moody's and Fitch have still kept it a
notch below triple-A.
An interest rate rise before a national election next May
could hurt perceptions of the Conservative-led coalition
government by raising mortgage costs and eating into disposable
income, which the opposition Labour party says is being eroded
by rising prices for everything from energy to transport.
"It is absolutely without question that those people who are
right on the edge at the moment will, with a small increase in
interest rates, be pushed over the edge," Conservative lawmaker
Mark Garnier told Reuters.
HITTING VOTERS IN THE POCKET?
Although Britain's $2.5 trillion economy has won back the
output lost in the convulsions of the 2008 crisis, Garnier said
it could be a hard sell to convince voters of the recovery if
they felt they had less money in their pockets.
"We can't just go to people and say: 'Yes, it's costing you
more, but overall the economy is bigger'. They'll just turn
around and say 'Well, it's not bigger for me'," he said.
While Britain's economy is growing fast now, its recovery
began much later than in the United States or Germany, and wages
have fallen significantly in real terms since the financial
Carney also said the central bank would weigh carefully the
merits of tackling housing market risks, including an
undesirable loosening in mortgage underwriting standards, when
its Financial Policy Committee meets later this month.
House prices in London have soared in the past year and
though rises outside the capital have been more modest, Carney
cautioned that average household debt was 140 percent of
disposable income - higher than in most other countries.
Osborne said he would grant the BoE new powers to impose
maximum loan-to-value and loan-to-income ratios on mortgage
lending, a step which Carney welcomed.
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
tightening, emphasising that Britain's economy was still a long
way from full strength.
On Thursday, he 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 the timing of a rise would depend on incoming
data, and the bank had no fixed plan on when to raise rates.
(Writing by David Milliken and Guy Faulconbridge; Additional
reporting by Kate Holton, William James, Andy Bruce, Anirban Nag
and Tricia Wright; Editing by Paul Taylor and Peter Graff)