- Pound slides to lowest since 2009 after speech in London
- Governor says journey to policy normalization is `still young'
Mark Carney signaled an increase in interest rates is still some way off, using his first speech of the year to highlight global economic risks and persistent factors weighing on inflation.
“Now is not yet the time to raise interest rates,” the BOE governor said in a speech at Queen Mary University of London on Tuesday. “The world is weaker and U.K. growth has slowed. Due to the oil-price collapse, inflation has fallen further and will likely remain very low for longer.”
Addressing his assertion last July that the outlook for tightening would come into sharper focus at the turn of the year, Carney said the decision to keep bank rate at a record low of 0.5 percent had “proved straightforward.” He said there needs to be “cumulative progress” in core inflation, domestic cost pressures and the prospects for growth momentum to push inflation back toward target.
With oil at a 12-year low and pay growth weakening, BOE officials are in no hurry to follow the Federal Reserve and lift interest rates. Carney stressed the differences between the two nations, saying the U.S. has stronger cost pressures while Britain faces a greater drag from fiscal policy and weak global inflation.
“The journey to monetary-policy normalization is still young,” Carney said. “Our expectation is that the path for the real interest rate that balances demand and supply will recover only gradually and to a limited extent compared to the pre-crisis era.”
Risks stemming from the international turmoil and the prospect of Britain voting to leave the European Union prompted banks including Goldman Sachs Group Inc., Bank of America-Merrill Lynch and JPMorgan Chase & Co. last week to push back their forecasts for the timing of the first rate increase to the fourth quarter. Investors are even more pessimistic, with a 25 basis-point increase not fully priced in until after March 2017.
While the planned referendum on Britain’s EU membership is a factor for economists shifting back their rate-increase forecasts, the vote hasn’t yet had an impact on investment, Carney said.
“At this stage obviously we’ve picked up heightened awareness about political events, some of which don’t have a specific time frame,” the governor said. “Investment intentions of businesses outside the energy sector continue to be quite robust and that’s what is factored into our forecast.”
The U.K. outlook is complicated by an “unusually uncertain” supply side, Carney said, noting that productivity seems to be stuck below its historical average while the labor supply has increased sharply, including above-average flows of net migration.
The current level of rates also reflects strong growth in private-domestic demand, Carney said. Officials are looking to return inflation to its 2 percent goal in around two years, but without an overshoot.
Consumer-price growth was just 0.2 percent in December, though core unexpectedly picked up to 1.4 percent. Carney said Tuesday that recent weakness in the pound may moderate downward pressure on the core rate, which strips out volatile components such as energy and food.
Sterling fell to the lowest level since March 2009 after Carney’s remarks were published, and was at $1.4220 as of 1:55 p.m. London time, after touching $1.4207.
“Given the scale of foreign disinflationary pressures, current domestic cost growth is not yet consistent with a firming in underlying inflation,” Carney said. “The MPC must remain vigilant for signs that low inflation is having second-round effects in the wage bargain, possibly via inflation expectations.”
The governor highlighted the international risks to the U.K. outlook and said downside risks stemming from emerging markets had begun to crystallize. The International Monetary Fund cut its world growth outlook earlier Tuesday.
“Further downside risks to the global outlook remain, reflecting the ongoing challenges in China, fragilities in other major emerging-market economies and the potential for contagion,” Carney said. “Chinese trade has been strikingly weak recently.”
Carney was among the eight-strong majority at the BOE who voted this month to keep borrowing costs at 0.5 percent, where they’ve been since March 2009, with only Ian McCafferty calling for a quarter-point increase. Gertjan Vlieghe, the newest member of the MPC, said on Monday that the lack of price pressure warranted patience.
"It didn’t make sense at the last meeting to tighten policy. I viewed that decision as a decision whether or not to tighten policy, not to go in the other direction," Carney said. "This is an economy that still has a fair bit of domestic momentum even in the face of challenges abroad."
The MPC said last week it will consider the “full implications” of the latest developments in its Inflation Report, due for publication on Feb. 4.
While noting that domestic demand is “still solid,” Carney said recent weakness in pay growth may raise questions about the amount of slack remaining in the labor market.