Bank of England Governor Mark Carney struck a more dovish tone on Tuesday when he was quizzed by lawmakers, remaining balanced on the issue of a sooner-than-expected rate rise.
Speaking in front of the Treasury Select Committee, Carney said there was more slack in Britain's labor market than expected, and this needed to be absorbed before interest rates started to rise.
It marked a change in tone from comments made earlier this month, when Carney said interest rates could rise sooner than expected . Government bond yields shot up and sterling rose to a near five-year high against the dollar as a result. Prior to this, most investors were not expecting a rate hike until 2015.
But on Tuesday, Carney stressed: "Taken in isolation the continuation of development on the wage front suggest to me ... that there has been more spare capacity in the labor market than we previously had thought."
Sterling fell to $1.6974 following the comments, before recovering slightly to trade 0.16 percent lower.
'Limited and gradual'
The central bank head added that the exact timing of a rate hike would be "driven by the data", and stressed that any rises would be "limited and gradual".
"This is the key message that the Bank of England is looking to get across and for businesses and consumers to take on board," Howard Archer, chief U.K. economist at IHS Global Insight, said in a note.
"The bank wants households and firms to structure their spending and investment decisions around the fact that while interest rates cannot stay down at 0.50 percent for a whole lot longer, they will not rise nearly as quickly or as far as in past tightening cycles."
When asked why he surprised investors with his more hawkish comments earlier this month, Carney said markets had not taken into account the firmer economic data coming out of the U.K.
"We'd like to see the market adjust to the data, just as our opinions are updating," Carney said. "We hadn't seen (that)." He stressed that it was "healthy" for market expectations for a rate rise to react to relevant economic data.
The U.K. economy had gathered more momentum than previously thought, Carney added.
It comes as the unemployment rate in the country continued to fall in the three months to April, hitting 6.6 percent, its lowest level since 2009. In the first three months of the year, the British economy grew by 0.8 percent , marking the fifth quarter of expansion in a row.
IHS' Archer added: "With the economy currently sustaining healthy momentum and the unemployment rate coming down markedly, we believe that the first interest rate hike is more likely than not to come in late-2014, although it is far from a done deal."
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