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Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

U.K. interest rates may need to be increased by a "somewhat greater extent" than is currently implied in financial markets, the Bank of England says. The pound isn't buying it.

Not Convinced by Bearish Bank of England
The pound dropped in the wake of the Bank of England's inflation report
(Intraday times are displayed in ET.)

In its quarterly inflation report published Thursday, the central bank left its inflation forecasts for the coming quarters largely unchanged. Based on current market expectations for interest rates, consumer price increases are still expected to outpace the bank's 2 percent target through the third quarter of 2020.

Faster Than Target
Bank of England forecasts for inflation
Source: Office for National Statistics, Bank of England

The central bank's near-term growth forecast, though, took something of a beating as officials slashed their 2017 business investment prediction to an increase of just 1 percent, down from May's 1.75 percent outlook.

Growth to Slow in Near Term
Bank of England forecasts for growth
Source: Office for National Statistics, Bank of England

It's the Bank of England's upbeat assessment of the outlook for wages, however, that's the key to skepticism about its willingness to tighten policy. The bank's 3 percent forecast for wage growth next year is above its prediction that inflation will average 2.5 percent.

Still Too Optimistic?
Bank of England forecasts for wage growth
Source: Bank of England

In the press conference following the publication of the inflation report, Bank of England Governor Mark Carney acknowledged that "there is an element of Brexit uncertainty that is affecting the wage bargaining, some firms, potentially a material number of firms, are less willing to give pay rises given it's not clear what their market access is going to be in the coming years." With unemployment at 4.5 percent, its lowest level since 1975, "we do think that wages will begin to firm," Carney said.

But with wage growth slowing for three consecutive months and declining to 1.8 percent in May, its weakest since November 2014, that looks overly optimistic. Sterling's drop suggests traders expect the Bank of England's bearish growls to be worse than any potential bite.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net