Mark Carney’s statement in his Mansion House speech on Thursday evening that “the first rise in interest rates …could happen sooner than markets currently expect” looked like a pretty plain signal that tighter monetary policy is not very far away.
Even so, while the first rise in interest rates now looks most likely to come in the first quarter of 2015, we still think rates will rise at a historically slow pace. With inflation and pay growth low, more labour market slack than the unemployment rate suggests and the housing market already showing signs of cooling, our assumption is that Bank Rate reaches only 1.5% by the end of 2016.
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