Bank of England chief downplays chance of interest rate hike

Xavier Trudeau
Juin 20, 2017

The clear message coming from the Bank of England's Governor's delayed Mansion House speech is that now is not the time to raise interest rates.

On Brexit, the governor said the country will soon "begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption".

The bank's Monetary Policy Committee last week voted 5-3 to hold the key interest rate at a record low 0.25%, an unexpected tally as analysts had expected at the most one policy maker to vote for a rate hike.

Speaking at London's Mansion House on Tuesday morning, the governor said that he believes the sclerotic wage growth and dwindling consumer spending now impacting the British economy provide reasons to avoid hiking interest rates, as some of the bank's most senior officials believe.

Indications of stronger trade or a rebound in investment to counter low household spending and rising wages should be apparent before policy is changed, Carney said, adding that he would first like to see "how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations".

It came after inflation hit 2.9 per cent in May - its highest level in almost four years and far higher than expected.

Following Carney's remarks, the pound fell by as much as 0.4% against the dollar.

Sterling dropped more than 10 per cent after last summer's referendum vote, which Carney said reflected financial markets' dim view of Brexit's likely effect on the economy.

'Monetary policy can not prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU.

"The UK houses some of the world's largest CCPs (central counterparty clearing houses)", he said. "Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing", he said.

With interest rates poised to remain lower, bank shares fell.

Those members who did back a hike cited concerns about inflation overshooting its government mandated target of 2% substantially in recent months as their reason for backing a hike, looking beyond the weaker wage growth and consumer spending cited by Carney in Tuesday's speech.

Martin Beck, lead United Kingdom economist at Oxford Economics, said it was unclear what Tenreyro's views were on United Kingdom monetary policy.

"This is not an imbalance that is, as yet, funding its eventual resolution", he said.

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