Pound near five-year high on Mark Carney rate rise hint

The pound has risen near to a five year high after the governor of the Bank of England, Mark Carney, signalled interest rates may rise this year.

Sterling rose 0.32% against the dollar to $1.698, while against the euro it was up 0.15% at 1.251 euros.

In a keynote speech, Mr Carney said a rate rise "could happen sooner than markets currently expect".

The consensus among economists was that rates would rise in the first half of next year, or even earlier.

BBC economics editor Robert Peston says that although the comments point to an increase this year, any rise "will be small and gradual".

Meanwhile, economists said market interest rates had risen 10 basis points on Friday morning - immediately raising business borrowing costs - while the futures markets had already priced in interest rate hikes.

Alan Clarke, eurozone and UK economist at Scotiabank, said Mr Carney had a habit of making big shifts in policy.

He said: "Three weeks ago he [Mr Carney] was dovish, now he is in camp hawk. He's not a steady Eddie, he's a bit more volatile."

Mr Carney was speaking in London on Thursday at the annual Mansion House dinner attended by City and business grandees.

'Gradual'

He acknowledged there was "already great speculation about the exact timing of the first rate hike" from the current record low of 0.5%, adding that the decision was "becoming more balanced".

Mr Carney emphasised that there was "no pre-set course" on when to raise rates. There was more spare capacity in the economy that would need to be used up first, he said.

And he also reiterated that the timing of the first rise was less important than the speed at which subsequent increases were made.

"We expect that eventual increases in Bank rate will be gradual and limited," he said.

Speaking at the Mansion House just before Mr Carney, Chancellor George Osborne confirmed plans to give the Bank new powers to prevent the housing market from overheating.

These will include capping the size of mortgage loans relative to income or to the value of the house.

The new powers would be given to the Bank's Financial Policy Committee by the end of this Parliament, Mr Osborne said.

He said: "We saw from the last crisis the dangerous temptations for politicians to leave the punch bowl where it is and keep the party going on for too long.

'Reserve power'

"I want to make sure that the Bank of England has all the weapons it needs to guard against risks in the housing market.

"I want to protect those who own homes, protect those who aspire to own a home, and protect the millions who suffer when boom turns to bust."

Former chancellor Lord Lawson told the BBC's Radio 4 Today programme the Bank of England's new powers to restrict mortgages were necessary as a backstop, as banks lent irresponsibly because they felt they were "too big to fail".

He added: "I do think it should be very much a last resort, a reserve power. The problem is that clearly the banks shouldn't lend irresponsibly. Why, then, do they?

"The conquest of the too-big-to-fail problem is a major unresolved problem and that's what I would like to see George Osborne focus on."

Mr Osborne also announced reforms to planning laws designed to increase the supply of housing. These should provide permission for up to 200,000 new homes, the government says.

The chancellor said the housing market did not pose an immediate threat to financial stability, but that if left unchecked, it could do so in the future.

In response, mortgage lenders said that a cap on the size of mortgage loans was unlikely to be "the first tool in the box" to cool the housing market.

Analysis: Jonty Bloom, BBC Business Correspondent

Mark Carney was headhunted from Canada to be the Governor of the Bank of England.

That is why his speeches are occasionally enlivened with obscure references to ice hockey, moose or, as in Thursday's speech, a rather strained metaphor linking central banking to canoeing.

But it was a much less colourful line in the speech that grabbed the headlines.

The first rate hike "could happen sooner than markets currently expect", he said.

Let me translate from Canadian. Everyone has been betting interest rates won't rise this year. They are wrong.

Until Thursday, the consensus was that rates would stay at 0.5% for until at least the beginning of next year and possibly longer.

But the economy is now growing far more strongly than predicted, and that means the Bank is thinking about when to raise rates and calm things down.