Photographer: Simon Dawson/Bloomberg

Carney Sees Brexit Consumer Slowdown Ahead After Strength

  • IMF lifts forecasts for 2017 growth, still sees cooling
  • Says U.K. policy makers can respond in either direction

Consumers, the backbone of U.K. economic resilience after the Brexit vote, face fresh headwinds in 2017 that are likely to curb growth, according to Mark Carney.

Bank of England policy makers will be monitoring developments closely as the impact of the weakening pound feeds through to prices, the governor said in London on Monday. Data on Tuesday will probably show inflation accelerated in December to the fastest since 2014.

The International Monetary Fund yesterday upgraded its growth forecast for 2017, yet it still sees a loss of momentum because of Brexit. The outlook heavily depends on Britain’s new deal with the European Union, and Prime Minister Theresa May may provide some details of her strategy in a speech on Tuesday.

“Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally,” Carney said. However, he warned consumption-led growth “tends to be both slower and less durable” as it eventually overtakes earnings, leaving demand more sensitive to household employment and income changes.

Neutral Stance

Reiterating the Monetary Policy Committee’s neutral stance, Carney said interest rates can go up as well as down, and that there are limits to the extent to which inflation above the BOE’s 2 percent target can be tolerated. The response of households to faster inflation as the U.K. negotiates its divorce from the EU will be key, he said.

“How household spending evolves, and the inter-temporal trade-off that households strike, will be important considerations over the next year,” Carney said.

In her speech, May could signal her willingness to quit the EU’s single market for goods and services to regain control of Britain’s borders and laws. Carney spoke after the pound had slipped below $1.20 for the first time in more than three months in response to reports of her plans.

He dodged a question on whether he saw the pound depreciating further, saying the U.K. currency “can go up and down.”

Trade Off

In a speech that largely focused on the theory behind policy makers’ trade-off between supporting growth and keeping inflation stable, Carney said there was not a simple rule that could guide their decisions.

Supply shocks like the Brexit decision imply lower growth and higher inflation rates due to sterling’s slide boosting import prices, Carney said. Because monetary policy primarily affects demand, bringing inflation to target too quickly risks a greater loss of output and jobs. That was why the BOE was right to loosen policy in August, he said.

The U.K. has faced a series of supply shocks since the financial crisis and has faced this trade-off before. By contrast, the U.S. and the euro area have seldom faced the same tension between output and inflation, he said.

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