Bank of England: Rate-increase ‘more balanced’

Bank of England (BoE) Governor Mark Carney said the judgment on when to increase the benchmark rate from a record low has become “more balanced” in recent months.

The U.K. is poised for the fastest growth in the Group of Seven this year and BoE policy makers are weighing when to begin removing emergency stimulus measures. While some members of the Monetary Policy Committee have started to push for a rate increase, the governor has voted with the majority, citing weak wages and anemic growth in Europe as reasons to keep borrowing costs at 0.5 percent.

“With many of the conditions for the economy to normalize now met, the point at which interest rates also begin to normalize is getting closer,” Carney said in a speech today in Newport, Wales. “While there is always uncertainty about the future, you can expect interest rates to begin to increase.”

Speaking to a conference of actuaries, the governor also said the BoE would step up oversight of people in the insurance industry and will begin consulting on that this year.

The MPC has “no pre-set course” on the timing of the first rate increase, and it will be data-dependent, Carney said. The nine-member panel has split for two months, with two officials voting for a quarter-point rate increase to reflect risks to inflation from a potential pickup in wage growth.

The economic outlook is “much improved,” though the time needed for headwinds to die down means that rate increases will need to be “gradual and limited” to help borrowers cope with higher costs, Carney said. With rates at a all-time low since March 2009, the bank is aware that “could encourage other risks to develop,” he said.

Mispricing Risks

Officials are also “alert to the possibility that financial markets may be mispricing risk,” he said.

The Financial Stability Board, which Carney chairs, has extended measures aimed at too-big-to-fail banks to cover insurance firms. The FSB published a list targeting nine insurers for additional capital rules, including MetLife Inc. and Prudential Financial Inc. in the U.S. and London-based Aviva Plc.

The BOE gained new supervisory powers over insurers last year, as part of the government’s broader push to consolidate financial oversight at the central bank. Its actions on banks have already encompassed an approved persons regime to cover executives at the firms it regulates.

Insurance Rules

Carney’s speech today, delivered to the Institute and Faculty of Actuaries General Insurance Conference, discussed the BoE’s oversight of the insurance industry. He said the BoE was mindful not to underestimate “the scale of the challenge” insurers face in implementing the European Union’s Solvency II requirements.

The systemic importance of some insurers means that new regulatory standards should also be accompanied by rules for executives, Carney said. The BoE will consult later this year on a regime to develop accountability for senior executives and actuaries, and is working with regulators elsewhere to develop the rules, he said.

“The people running insurance companies should be more clearly held accountable for their actions,” he said. “It is now clear that in some parts of the financial sector, the link between seniority and accountability had become blurred or even severed.” 

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