INTEREST rates could start to increase from the turn of the year, Bank of England governor Mark Carney has suggested.

Mr Carney said he expects the bank rate to rise over the next three years from its current all-time low of 0.5 per cent

Experts say they believe rates could be as high as two per cent by 2017.

But he said shocks to the economy and shifts in the exchange rate could impact on the timing and size of any increases.

His prediction builds on comments he made to the Treasury Select Committee, on Tuesday, in which he indicated the UK is moving closer to a rise in interest rates after more than six years at historical lows.

In a speech at Lincoln Cathedral, Mr Carney said: “There is a wide distribution of possible outcomes around any expected path for bank rate, reflecting the inevitability that the economy will be buffeted by shocks and that monetary policy will have to adjust accordingly.

“Short-term interest rates have averaged around 4.5 per cent since around the Bank’s inception three centuries ago, the same average as during the pre-crisis period when inflation was at target.

“It would not seem unreasonable to me to expect that, once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.

“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.”

Howard Archer, chief UK and European economist at IHS Global Insight, said Mr Carney had reinforced comments from the Bank of England “seemingly preparing consumers and businesses for an interest rate hike.”

He added: “For the time being, we are maintaining the view the Bank will lift interest rates to 0.75 per cent in February 2016.

“Regardless of whether the Bank first acts in late 2015 or early 2016, we see interest rates only rising to 1.25 per cent by the end of 2016 and two per cent by the end of 2017."