Bank of England governor Mark Carney has suggested that interest rates could begin to rise at the turn of this year. Carney said he expected the bank rate to rise over the next three years from its current all-time low of 0.5%. He said rates would likely rise slowly, reaching a level that is "about half as high as historical averages" of 5%.
But he said shocks to the economy and shifts in the exchange rate could impact on the timing and size of any interest rate increases.
Mark Carney speaks during the Bank of England Financial Stability Report press conference on July 1, 2015 in central London, England
His prediction builds on comments he made to the Treasury Select Committee on Tuesday, in which he indicated the UK is ''moving closer'' to a rise in interest rates after more than six years at historical lows.
Carney told MPs that Britain is edging towards being able to raise rates based on the strength of the recovering UK economy, which was the fastest growing of the G7 nations last year.
In a speech at Lincoln Cathedral tonight, Carney said the Monetary Policy Committee "will have to feel its way as it goes", adding: "There is, in fact, a wide distribution of possible outcomes around any expected path for bank rate, reflecting the inevitability that the economy will be buffeted by shocks and that monetary policy will have to adjust accordingly."
Carney said: "Short-term interest rates have averaged around 4.5% since around the Bank's inception three centuries ago, the same average as during the pre-crisis period when inflation was at target... It would not seem unreasonable to me to expect that, once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.
"In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year."