Carney to Ignore Inflation Overshoot as Economists See Rate Cut

Updated on
  • Price growth to accelerate to 2.4% in 2Q 2017, survey shows
  • Policy makers predicted to cut rate to 0.1% in November

Is the BOE Doing More Harm Than Good?

Bank of England Governor Mark Carney isn’t finished yet.

Economists in a Bloomberg survey predict another interest-rate cut in November, adding to the stimulus unveiled this month, even as they see U.K. inflation busting through policy makers’ 2 percent target just months later. The survey also puts the probability of Britain sliding into a recession in the next 12 months at a record 48 percent, underscoring the dilemma as the BOE weighs the risk of stoking further inflation against inaction in the face of a Brexit-induced slump.

The quandary has already divided the central bank’s nine-member Monetary Policy Committee, with some officials opposed to the new round of QE. While the June decision to leave the European Union has darkened the growth outlook, it’s also weakened the pound, pushing up costs for importers and forcing the BOE to look through any exchange rate-driven inflation spike to help the economy.

“Past experience shows you that the bank will be forced to ignore it if growth remains fairly sluggish,” said Peter Dixon, an economist at Commerzbank AG in London. “Central banks take the view that what’s more important is the stability of the overall system rather than simply trying to hit an inflation target which in any case is going to be impacted by lots of things that are beyond the bank’s control.”

U.K. consumer-price growth will climb to 2.4 percent in the second quarter of 2017, according to the median estimate of 22 economists surveyed by Bloomberg. The forecast suggests a more intense pass-through of the pound’s weakness than the BOE anticipates. Sterling has fallen almost 13 percent against the dollar since the Brexit vote, though the central bank only sees price growth breaching the 2 percent goal in early 2018.

But economists also see the economy shrinking 0.1 percent this quarter and stagnating next. Growth will slow to 1.6 percent this year from 2.2 percent in 2015 and fade to just 0.6 percent in 2017.

Against that backdrop, the MPC will cut its key rate to 0.10 percent in November, according to the majority of economists surveyed. That may further weaken sterling, which was below $1.30 for a second day on Friday.

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Policy makers reduced the key rate to a record-low 0.25 percent on Aug. 4 and said that should their outlook for the economy prove correct, a majority “expect to support a further cut in bank rate to its effective lower bound.” Carney has ruled out rates below zero, saying they have had “negative consequences” elsewhere.

Signs of tension over how far to go were already evident at the August meeting, when officials announced the rate cut, purchases of government and corporate bond purchases and a lending program for banks. 

External officials Kristin Forbes, Ian McCafferty and Martin Weale all opposed the plan to increase asset purchases, saying the initial surveys may overstate economic weakness, and that buying more bonds risked pushing inflation even further above the bank’s goal. Forbes also opposed the plan to buy corporate assets.

The U.K. will get its first taste of the Brexit vote’s effect on inflation next week when the Office for National Statistics releases its July consumer-prices index. It’s likely to have edged higher, according to Bloomberg Intelligence economist Dan Hanson, who recommends looking at the food category as an early indicator of the impact of sterling’s slide.

— With assistance by Jill Ward, and Scott Hamilton

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