June 13 - British interest rates could rise sooner than financial markets expect in a surprisingly stark warning that monetary policy may start to tighten within months. Joanna Partirdge looks at the reasons why and implications of the decision.
A stark warning to financial markets. SOUNDBITE: Mark Carney, Governor of the Bank of England, saying (English): "There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced. It could happen sooner than financial markets currently expect." Bank of England Governor Mark Carney's speech to London's financial community saw investors scramble to action. They'd been expecting a rise next spring - not later this year - and Swaha Pattanik from Reuters Breakingviews says there's now an feeling of uncertainty. SOUNDBITE: Swaha Pattanik, Reuters Breakingviews, saying (English): "It's not very clear, are they looking at wage inflation, which is very low at the moment and doesn't need rate rises, are they trying to help the, sort of tame the housing market with a rate rise as well as FPC measures? Are they looking at just the unemployment rate, productivity which is a puzzle with itself?" London's main share index fell around 1% - while sterling soared to five year highs on Friday. Britain's economy is outperforming its peers, growing at a near 3% annual rate. A rate rise this year would mean the Bank of England hikes at least 6 months before any tightening's expected from the U.S. Federal Reserve, and contrasts sharply with the ECB, which has just cut rates again. But that doesn't surprise Will Hobbs from Barclays. SOUNDBITE: Will Hobbs, Head of Equity Strategy, Barclays, saying (English): "Retail sales and unemployment data have for some time been telling a different story to the GDP data. For some time this economy hasn't looked in need of emergency monetary policy levels and I think the sooner than we get towards starting to normalise monetary policy, the less concerned we would be about the potential for overheating." One area where there's concern about overheating - house prices. They've risen 11% in the past year and policymakers are under pressure to prevent a bubble. Carney's concerned mortgage lending is becoming looser. Property stocks also slid on Friday - housebuilders Persimmon and Barratt Developments lost more than 6 percent. The cost of housing and living standards are due to be major political issues in next year's UK election. And voters will be wary of rates - and their costs - rising higher.