Carney Says BOE May Need to Remove Stimulus as Slack ErodesBy
Governor says tolerance of above-target inflation ‘limited’
Officials will look at wages, growth in coming months
Mark Carney said the Bank of England’s Monetary Policy Committee may need to begin raising interest rates and will debate a move in the next few months.
“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional,” Carney said in prepared introductory remarks for a panel at the European Central Bank Forum on Wednesday in Sintra, Portugal. The pound rose after his remarks.
The comments mark a shift in emphasis after the governor signaled last week that now was not yet the time to start that process. In his speech on Wednesday, he clarified that that was his position as of when the MPC last met on June 15. Lifting rates hinges on whether spare capacity in the economy erodes and the balance between supporting growth and tolerating faster inflation becomes less stark, he said.
“When the MPC last met earlier this month, my view was that given the mixed signals on consumer spending and business investment, it was too early to judge with confidence how large and persistent the slowdown in growth would prove,” he said. “Moreover, with domestic inflationary pressures, particularly wages and unit labor costs, still subdued, it was appropriate to leave the policy stance unchanged at that time.”
Sterling strengthened against the dollar after the publication of Carney’s speech and was trading at $1.2969 as of 3:45 p.m. London time, up 1.2 percent on the day.
Policy makers voted 5-3 to keep interest rates on hold earlier this month, though officials as a whole noted that their “tolerance of above-target inflation” was being tested. The BOE expects the inflation rate to breach 3 percent within months, well above the 2 percent target.
Kristin Forbes, who leaves the bank this week, was joined by policy makers Michael Saunders and Ian McCafferty in voting for an increase to the benchmark rate. Chief Economist Andy Haldane has since said he considered a hike, while Deputy Governor Jon Cunliffe told BBC Radio in an interview on Wednesday that subdued domestic pressures buy policy makers time before they need to hike rates.
Carney said in Sintra that he will look at three factors to inform his decision about raising rates: the extent to which weaker consumption growth is offset by other areas of demand such as business investment, wages and labor unit costs, and how the economy reacts to Brexit.
“These are some of the issues that the MPC will debate in the coming months,” he said.
Bloomberg’s latest forecast of economists -- conducted before Haldane’s remarks -- saw the BOE staying on hold until at least mid-2019. That would be after Brexit talks are due to be completed.
The MPC announce its next rate decision on Aug. 3, when it will also publish new economic forecasts.
— With assistance by Lucy Meakin, and Jill Ward