Carney's New-Found Slack Fails to Damp Expectations of BOE Hike

  • Most economists surveyed say next rate move to be an increase
  • Data Tuesday forecast to show inflation closing in on target

Mark Carney’s surprise discovery of additional slack in the U.K. economy hasn’t shifted the view on the direction of interest rates.

The next move will be an increase, according to 87 percent of economists surveyed by Bloomberg News. That consensus is stronger than a month ago even though more than two-thirds agree that with the Bank of England Governor’s assessment that there’s more labor supply than they previously assumed, meaning wages -- and therefore prices -- should be restrained.

“With the economy growing at a relatively robust rate, then the next move in rates is more likely to be up than down,” said Investec Securities economist Victoria Clarke. “But the BOE is going to be neutral for a while -- we think well into 2019 -- as it guards some of those downside risks and the risk Brexit goes badly.”

The findings come a day before data will probably show consumer-price growth accelerated to 1.9 percent, the fastest since 2014. Policy makers forecast that the pound’s slide and higher energy costs will push inflation through their 2 percent goal as early as this quarter, with a peak of 2.8 percent in 2018.

That lies uneasily with the key interest rate, which remains at a record-low 0.25 percent after the BOE’s August cut to support growth following Britain’s vote to leave the European Union. After keeping policy unchanged on Feb. 2, Carney emphasized that the divorce process was only starting and that consumer spending and investment are likely to weaken this year.

While BOE officials maintained their neutral stance on rates at this month’s decision, they have expressed limited tolerance for above-target inflation, with some saying they are “closer to those limits.”

That group probably includes Kristin Forbes, who last week said she is starting to “grow uncomfortable with the trade-off embodied in our current forecast.” If economic data continues to pick up, this “could soon suggest an increase in bank rate,” she said.

Forbes -- who will leave the BOE in June -- also said she disagrees with the Monetary Policy Committee’s estimate of the rate that unemployment can fall to without fanning inflation, saying it is likely below 5 percent, but not as low as 4.5 percent estimated by the BOE last week.

Most of 23 economists, however, agreed with that estimate. Seven judged that the new forecast is too low and one said it’s too high.

— With assistance by Scott Hamilton

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