Carney Says Brexit Battle Is Switching to Tackling Inflation

Updated on
  • Bets on a U.K. interest-rate hike in August have increased
  • BOE is due to update its economic forecasts next week
Carney says the BOE expects investment to pickup in 2019.

Mark Carney said he can fully focus on tackling inflation as the drag from Brexit on investment and the economy starts to recede.

“As slack in the economy has been taken out, we’ve moved into a more conventional area for monetary policy where the focus is increasingly on returning inflation sustainably to target over an appropriate horizon,” the Bank of England governor said on Tuesday.

The BOE will announce its next policy decision on Feb. 8 alongside new economic predictions. Strong employment figures alongside better-than-forecast growth data, set against a strong global backdrop, have increased the chance of a summer interest-rate hike. While November was once seen as the most likely month, bets on a hike in August -- or even as soon as May -- have risen in recent weeks.

“Carney is right to point out that the U.K. is benefiting from this pickup in global demand and the spillover is the big question mark for the inflation forecast,” said Simon French, chief economist at Panmure Gordon. “Investors should look at next Thursday for what I think will be quite a hawkish tone from the bank, guiding markets toward expecting a hike in the middle of the year, potentially at the May meeting.”

Second Hike

Traders see a rising chance of a BOE rate increase in May or August

Source: Bloomberg

The shift to concentrate more on prices was apparent when officials raised the bank’s benchmark for the first time in more than a decade in November, and said they were likely to tighten policy further in the coming years. Inflation currently stands at 3 percent, a full percentage point above the BOE’s target. The bank’s measure of the market’s expectations now shows about three quarter-point rate increases priced in over the next three years.

While the pound’s depreciation since the Brexit vote is still working its way through the inflation data, spare capacity in the economy is also getting used up. The BOE has both cut and raised rates since the U.K.’s 2016 vote to leave the EU in an attempt to balance accelerating price gains -- boosted by both the pound’s fall and weak productivity growth -- with a cooling economy.

BOE Defense

Carney also defended the BOE’s forecasts made before Brexit, saying they correctly showed the economy would suffer. He’s previously been accused of being too gloomy.

“What we said prior to the referendum is that we thought the exchange rate would fall, perhaps sharply, inflation would go up, and growth would slow,” the BOE governor said. “After the referendum, the pound fell sharply, inflation went up, and growth slowed.”

Growth in business investment is likely 4 percentage points lower than it would’ve been had the U.K. voted to stay in the bloc and real household incomes have gone down by about 3.5 percent since the referendum, he said.

Carney expects a pickup in investment in 2019, in part because of stronger global growth and demand. “There are some headwinds to this economy that we all want to see cleared,” he said, referring to Brexit uncertainty.

Norman Lamont, one of the committee members and a former Chancellor of the Exchequer, asked if the BOE had a bias against Brexit, which Carney denied.

Government forecasts on the impact of Brexit were leaked this week, reigniting the debate over subjectivity in projections. The analysis modeled three scenarios, from no trade deal with the EU to membership of the European Economic Area, and showed that all would hurt growth.

Asked if the bank has carried out a similar long-term exercise, Carney said that policy makers usually look at only a three-year horizon. In terms of financial stability, officials assess a disorderly Brexit, which isn’t a likely scenario but one the central bank can plan for.

“When the negotiations mature to a point where we know where we’re headed and when we get there, then we will have to do that sort of analysis and adjust the forecasts accordingly,” he said.

— With assistance by Lucy Meakin, and Catherine Bosley

(Updates with economist quote in fourth paragraph.)
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