Pound spikes as Mark Carney says first interest rate rise 'getting closer'

The Governor said keeping interest rates low for too long could encourage other risks to build up in the financial system, including in the housing market, which he said posed the "biggest risk" to the economy, as well as the "possibility that financial markets may be mispricing risk.

"There are increased signs of complacency in financial markets, in part reflecting search for yield amidst exceptionally accommodative monetary policies. Volatility has become compressed and asset valuations stretched across a growing number of markets, increasing the risk of a sharp reversal,” he said.

However, the Governor said there was no "pre-set course" for interest rates. "The timing will depend on the data," he said.

Mr Carney repeated a pledge that any increases would be "limited and gradual" because the headwinds facing the UK economy were "likely to take some time to die down". He said high debts and muted demand from Britain's main export markets meant Bank Rate would also end up lower than its long-run average of around 5pc.

In a separate interview, Minouche Shafik, the Bank's deputy governor for markets and banking, said policymakers might have to raise rates more quickly if pay rises aren't matched by higher productivity.

Minouche Shafik, who is in charge of markets and banking, said that without stronger productivity, wage increases would start to push up prices.

“If wage increases are expected but productivity is performing well we can wait for longer; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up," Ms Shafik told the Yorkshire Post .

“I think that’s the key choice that we face,” said Ms Shafik, who sits on both the Monetary Policy Committee (MPC), which sets interest rates, and the Financial Policy Committee (FPC), which recently took steps to try to stop the housing market from overheating.

Markets expect rates to start rising early next year. However, Martin Weale and Ian McCafferty, two more MPC members, have argued that rates should begin rising now because survey data suggest pay rises could start to rise sharply. Mr Weale and Mr McCafferty have voted for rate rises for the past two months.

However, while the recent strong growth in the UK was "encouraging", a sustainable recovery was not yet secure. Ms Shafik stressed that the Bank would not "take risks with this recovery.

"It’s been a long recession and I think that’s going to be the biggest challenge going forward," she said.

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