BoE's Carney expects gradual rise in interest rates up to 2.5% over next three years

FXStreet (Łódź) - On Tuesday BoE Governor Mark Carney and MPC members Paul Fisher, David Miles and Martin Weale appeared before the UK parliament's Treasury Select Committee to give evidence on the February Inflation Report.

The testimony kicked off with questions about the changes in BoE's forward guidance, introduced last month. The new strategy includes lowering the 7% unemployment target serving as a rate hike trigger and making the increase conditional on a broader range of factors such as spare capacity in the economy, labor productivity and wage growth.

When asked about the amount of spare capacity in the UK economy Carney suggests it could be slightly above 1.5% of GDP, although Martin Weale's opinion is that it is less than 1%.

The governor defended the decision to change the forward guidance, saying that the UK economy experienced a much quicker improvement then the rest of the developed world. Inflation expectations have improved in the last few months he said adding that estimates for 2-3% base rate not unreasonable.

He suggested that BoE could raise rates up to 2.5% during the next three years, in a gradual manner.

“Charlie Bean yesterday referenced 2.5 percentage points,” Carney reminded. “I don’t think that’s an unreasonable sense to get across - a 2-2.5 percent bank rate over the course of the forecast horizon.”

He also said that the BoE wouldn't start unwinding its quantitative easing programme until hiking interest rates several times and that it wouldn't consult the Treasury about it.

On the issue of the rising house prices in the UK, the governor says the BoE is aware of the risks. If the increase is due to a rise in incomes, it is a positive sign but if the driving force are “extrapolative expectations,” a bubble could form and put “a large number of households in a vulnerable position.”