Better Forecasts Not Enough for Carney in Brexit's Shadow

  • BOE is seen raising growth, inflation forecasts for 2017
  • Policy makers may signal medium-term price pressure unchanged

For Mark Carney, better won’t be good enough.

The Bank of England governor, overseeing an economy recording solid expansion and accelerating inflation, will probably raise near term projections for both this week, according to economists. At the same time, he may highlight potential longer-term threats from Brexit that may damp any speculation about tighter policy.

It’s a delicate balancing act for Carney, who spent much of 2016 fending off accusations he was being far too gloomy about the economy. While inflation will breach the BOE’s 2 percent target within months, the Monetary Policy Committee has indicated it’s keeping its emphasis on supporting growth for now, a trade-off that may become more challenging if the economy keeps up its current momentum.

“On the face of it, the inflation forecast and the fairly resilient growth performance argues for a more hawkish message,” said Sam Hill, an economist at RBC Capital Markets. “But given the headwinds that are approaching related to Brexit, it’s likely the MPC will spend some time making clear just how much room they’ve got to look through a period of inflation being above target.”

Economists predict the BOE will keep its key interest rate at a record-low 0.25 percent and leave the size of its quantitative-easing program unchanged on Feb. 2. In August, officials announced a 60 billion-pound ($75 billion) expansion of their gilt-purchase plan, a round of bond buying that is set to expire in February.

Fed, BOJ

In its last forecasts in November, the BOE projected growth of 1.4 percent this year and 1.5 percent in 2018, with inflation about 2.7 percent in both years. Since then, the pound has stopped falling and the economy has maintained its 0.6 percent pace of quarterly expansion. Another bright spot may be a stronger global backdrop. The Federal Reserve and Bank of Japan also announce policy decisions next week.

All but two out of 19 economists in the Bloomberg survey see the MPC raising its growth forecast for this year, while the majority see the panel also raising its inflation projection. However, most see the bank leaving its estimates for next year unchanged.

Three months ago, Carney said the bank’s next rate move could be up or down. U.K. consumer-price growth rate jumped to 1.6 percent in December, and some economists see it reaching as much as 3 percent this year, well above target. That’s prompted traders to raise bets on an interest-rate increase this year.

Yet concern that Brexit will hurt trade is expected to hit business investment, and faster inflation means consumer spending will probably slow. U.K. companies from BT Group Plc to Whitbread Plc have warned about the outlook, while U.S. President Donald Trump has raised the specter of trade wars. Economists don’t see the MPC changing tack any time soon, with Bloomberg surveys showing no policy change until at least 2019.

“The messaging we get may well be taken as hawkish,” said Liz Martins, U.K. economist at HSBC Holdings Plc in London. “However, we are not persuaded that the MPC is yet in hawkish mode.”

The meeting will be the last for Deputy Governor for Markets and Banking Minouche Shafik before she leaves to become director of the London School of Economics. The Treasury has yet to announce her replacement.

— With assistance by Harumi Ichikura

    Before it's here, it's on the Bloomberg Terminal.