The Bank of England may start to raise interest rates next spring if the labour market continues to recover from the financial crisis, governor Mark Carney said today.
He said forecasts last month showed that if rates started to go up in spring 2015, as markets were predicting at the time, inflation would be on course to settle close to its 2% target in three years' time.
"With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer," Carney said in a speech to representatives of UK trade unions.
Britain's economy has staged a surprisingly strong recovery since the middle of last year, raising the prospect of the Bank of England increasing borrowing costs before the US Federal Reserve.
Most economists expect UK interest rates to start to rise around February, but Carney stressed there was no concrete timetable.
"We have no pre-set course, however; the timing will depend on the data," he said in today's speech.
The Bank of England boss said that wage growth in Britain had been very weak - it actually fell in year-on-year terms in the most recent reading.
But this reflected how the country had seen a surge in people seeking work, and there were signs that wages could pick up modestly in the coming months, Carney added.
The Bank of England would watch closely how pay settlement sturn out at the turn of the year and "take a steer" from growth in starting salaries for people starting new jobs, he said.
This would be consistent with most economists' expectations that the Bank of England will not raise interest rates before February, despite the fact that two of its nine policymakers voted for a rate rise in August.
The BoE put wage growth more explicitly at the centre of its thinking on when to raise interest rates last month.
Carney reiterated the view of the bank's policymakers that the amount of slack in the labour market was equivalent to around 1% of Britain's economic output, and said he did not expect wages to rise faster than inflation until the middle of next year.
"In other words, there is still slack in the labour market that must be used up," Carney said, adding that recent upgrades to estimates of British economic growth to 2012 were unlikely to change that view materially.
But he also said the BoE would not allow inflation risks to build. "The current inflation environment is benign. But it will not remain benign if we do not increase interest rates prudently as the expansion progresses," he said in the speech.
Carney repeated the Bank of England's message that when the time comes for interest rates to go up, they will increase only gradually and probably to a level below the pre-financial crisis average.
