Carney Faces Lawmakers as Pound Drop Lifts Inflation

  • Economists predict inflation rose to 1.1% in October
  • Governor Carney set to testify before lawmakers on Tuesday

British Pound Wins With Trump Victory

Mark Carney is under pressure on two fronts this week.

Accelerating inflation will highlight the economic battle ahead for the Bank of England governor, and an appearance before lawmakers threatens to revive a lingering controversy over his term. While Carney has said he’ll stay a year longer until 2019, Treasury Committee Chairman Andrew Tyrie is critical of him breaking the eight-year-term set down in statute.

Questions on inflation may dominate, however, as the Parliament testimony will start just as the country is digesting data showing another pickup in prices. Part of that is due to the pound’s Brexit-induced slump, and public concern has been sparked by high-profile hikes in the cost of products such as Marmite spread and Walkers potato chips, and even alterations to the famous triangular shape of Toblerone chocolate bars.

For Carney and fellow BOE policy makers, the changed inflation outlook -- along with a stronger-than-expected economic performance -- forced them to shift their stance on policy this month. They dropped plans to cut interest rates for the second time this year and instead said the next move could be up or down.

“We assume it eases monetary policy further in an effort to encourage consumers to smooth through the shock to their real incomes,” said Rob Wood, chief U.K. economist at Merrill Lynch. However, “that might be a tough ask, with interest rates close to their effective lower bound, BOE independence seemingly being questioned by politicians and higher political risk premia.”

Accelerating Fast

Economists predict that the statistics office report at 9:30 a.m. on Tuesday in London will show inflation at a two-year high of 1.1 percent. That’s below the BOE’s 2 percent target, but it’s accelerating fast, and the BOE sees it reaching 2.8 percent by the end of next year.

Thirty minutes later, Carney will face the Parliament’s committee. Previous hearings this year have been confrontational at times, and one member, Jacob Rees-Mogg, even called for the governor’s resignation.

Carney has also faced criticism from some politicians over the BOE’s decision to boost stimulus after the Brexit vote in June, including comments by Prime Minister Theresa May that loose monetary policy causes “bad side effects.”

For now, further BOE loosening appears to be on hold. The median forecast in the most recent Bloomberg survey shows interest rates will remain unchanged for at least two years. A small majority of economists said the next move will be a hike, something the U.K. hasn’t experienced since 2007.

That’s because the pound’s 16 percent slide since the EU referendum in June to $1.2528 as of 12:03 p.m. London time has “adversely affected” how BOE officials view the trade-off between supporting growth and reining in inflation. They said on Nov. 3 that they can “respond in either direction to changes in the economic outlook.”

The yield on the 10-year U.K. government bond was up 10 basis points at 1.46 percent on Monday after earlier touching the highest level since May.

Little Tolerance

The BOE also revised its estimates that day and sees inflation at 2.5 percent in late 2019, the biggest three-year overshoot it’s ever predicted. While officials said their tolerance for faster price gains is now limited, Carney has so far declined to identify if there’s a rate they would consider too high.

That’s a question that might come under increasing scrutiny as inflation pressures build and the growth outlook alters in the coming months, even if Carney manages to deflect it from lawmakers this week.

What the BOE’s revisions “point to is the perilous nature of forecasting in such an uncertain environment,” said Simon Wells, chief European economist at HSBC Holdings Plc. “It is not surprising that assessments of the outlook will shift too.”

— With assistance by Harumi Ichikura, Jill Ward, and Scott Hamilton

(Corrects month of inflation data in first deck headline.)
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