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 Carney said in a speech late on Thursday that the British economy's
strong momentum meant the decision on when to raise rates would come
into sharper focus around the end of this year.
Sterling extended gains on Friday, touching a new 7-1/2 year high
against a basket of other currencies <=GBP>, as until recently
financial markets had not expected rates to rise before mid-2016.
But many economists treated his remarks with caution, as similar
comments in 2014 were not followed up by higher rates.
Carney's speech puts the British central bank on track to follow the
U.S. Federal Reserve by raising interest rates in the near future,
after more than six years at rock-bottom levels amid the fallout of
the global financial crisis.
"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," Carney said in a speech at Lincoln Cathedral in eastern
England.
A slump in oil prices in the second half of last year put paid to
earlier plans by the BoE to raise interest rates, as inflation
tumbled towards its lowest rate since 1960.
British government bonds reacted cautiously to Carney's comments,
with little change on Friday in their pricing for a rate rise, as
they had been wrong-footed last year.
"However, the pick-up in wages makes this time far more likely to be
'for real'," Jamie Searle, a fixed income strategist at Citi, said.
FIRMER INFLATION
Carney said inflation pressures were now starting to firm again.
British wages -- a key metric for the central bank -- have recorded
their fastest growth in over five years, and Carney said he expected
the effect of falling oil prices to drop out of the annual inflation
rate around the turn of the year.
But he also said sterling's recent strength would act as a brake on
higher rates, and that this was "particularly relevant" as the
monetary policies of the euro zone and Britain diverge.
Carney said the prospects for higher rates depended on wringing out
the remaining slack in the economy, which would require sustained
economic growth of around 0.6 percent per quarter.
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In the medium term, he predicted interest rates would probably rise
to a level about half as high as their historical average of around
4.5 percent.
Outgoing MPC member David Miles on Tuesday suggested the right level
of interest rates, to keep inflation on track and demand in line
with capacity, would be around 3 percent in two years' time. Miles,
usually seen as a "dove", surprised markets by saying it was "likely
to be right" to hike rates soon.
There is now a strong possibility that August's meeting could see a
renewed split among the nine BoE rate setters for the first time
this year. In the second half of last year, before inflation started
to tumble due to lower oil prices, MPC members Martin Weale and Ian
McCafferty voted for higher rates.
But rising productivity, and the risk that underlying inflation
would be slower to pick up than some at the BoE expected, made a
rate rise in early 2016 the most likely option, J.P. Morgan
economist Allan Monks said.
Carney also acknowledged the risks to Britain's economic outlook,
including its large current account deficit. This argued for a
"right policy mix" that includes tight fiscal policy. "Given these
considerations, the MPC will have to feel its way as it goes," he
said.
(Additional reporting by David Milliken; Editing by Toby Chopra)
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