Carney's Quiet Period Ends With U.K. Demanding AttentionBy
BOE set to announce policy decision after slew of weak data
Governor is also set to speak in London on Thursday evening
The Bank of England might have been in a quiet period, but the U.K. economy certainly has not.
It’s been more than a month since Governor Mark Carney last spoke publicly and, in that time, plenty has changed. Growth has been revised the wrong way, inflation is going up faster than anticipated, real wages are sliding, and now a disastrous election for the Prime Minister has raised new questions over Brexit, adding a fresh source of economic uncertainty.
While the backdrop changed dramatically during the pre-election and rate decision purdah period, economists say the BOE itself won’t do anything when it makes its latest policy announcement at noon in London on Thursday. With no change in interest rates in the offing, the focus will be on the eight policy makers’ latest assessment and, just hours later, a speech by Carney himself at the annual Mansion House address in the heart of London’s financial district.
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Carney has previously used the high-profile event to criticize bankers’ conduct and offer clues on interest rates, and Thursday’s event is an opportunity for him to set out his stall amid the period of uncertainty for the U.K.
“He’s still going to want to be fairly cautious, especially given that in the latest few months of data, there’s nothing there to suggest that the economy is booming and that inflation is being demand-driven,” said James Rossiter, an economist at TD Securities in London and former BOE official. “You’re looking at real wage growth that’s negative on a year on year basis, and that’s going to be worrying them a little bit.”
Chancellor of the Exchequer Philip Hammond will also speak at the Mansion House event, where he will make the case for a new path for Brexit that focuses on protecting jobs and economic growth.
While the BOE said in May it expects rates to go up at some point over its three-year forecast horizon, it’s been vague on the timing and indicated it’s in no rush. Most economists see no move from 0.25 percent until 2019.
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That analysis is largely based on the BOE’s trade-off between growth and inflation -- a balancing act that has become increasingly challenging this year.
Policy makers have already been wrong-footed by the stalling of growth, stating in May that the 0.3 percent increase in first-quarter GDP was an underestimation. That was proved folly when it was revised down to just 0.2 percent, the lowest among the Group of Seven. Data on Thursday showed retail sales fell more than forecast in May, a further sign of consumer weakness.
Against that backdrop of sluggish growth, inflation is also proving problematic. At 2.9 percent, it’s at the highest in four years and already above the average for what the BOE expected for the second quarter. It’s forecast to reach about 3 percent later this year.
A lot of the price outlook depends on commodity prices and the currency. While sterling fell after the Brexit vote in 2016, it’s regained some ground this year, strengthening about 5 percent in the past three months. Policy makers will likely be wary of the risk that some of that rebound could be undone by the election result though, if pound traders begin to seriously question the stability of the government and of the U.K.
Inflation is just one side of the problem facing U.K. consumers. As they grapple with rapid price gains, their wages are simply not keeping pace. That means a squeeze on pockets and less momentum from domestic demand.
“With real wage growth so weak and substantial uncertainty surrounding the Brexit process and domestic politics we doubt there is any serious risk of an upside surprise to rates anytime soon,” Nomura economist George Buckley wrote in an emailed note, “We thus stick with our view of no move in rates higher until the second half of 2019.”
— With assistance by Jill Ward