Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options. HOMEPAGE

CARNEY: Now is not the time to raise rates

Mark Carney
Bank of England Governor, Mark Carney, delivers a speech to the Bankers and Merchants at The Mansion House in London, Britain June 20, 2017.
Reuters/Stefan Wermuth

LONDON — Bank of England Governor Mark Carney does not believe that it is time for Britain's central bank to raise interest rates, despite inflation climbing sharply above target in recent months.

Advertisement

Speaking at London's Mansion House on Tuesday morning, the governor said that he believes the sclerotic wage growth and dwindling consumer spending currently impacting the British economy provide reasons to avoid hiking interest rates, as some of the bank's most senior officials believe.

"From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment," Carney told a gathering of the UK's most prominent financiers in the speech.

"In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations."

Alongside the more standard concerns about the economy like wage growth and consumer spending, Carney cited worries about Brexit, and particularly how Brexit impacts household sentiment, as a reason for his belief that rates should stay on hold for the time being.

Advertisement

"During the negotiating period the economy will be importantly influenced by the expectations of households, firms and financial markets about the nature of both the transition and the longer term economic relationships with the EU and other countries," he said.

"Markets have already anticipated some of the adjustment. Depending on whether and when any transition arrangement can be agreed, firms on either side of the channel may soon need to activate contingency plans.

"Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption," Carney added.

Carney's speech comes just four days after the bank's eight member Monetary Policy Committee (it is usually made up of nine people, but has stood at eight since the resignation of Charlotte Hogg in March) voted 5-3 in favour of holding rates, with three MPC members backing a hike in the bank's base rate.

Advertisement

That was the highest number of members to back a hike for some time and was just one member away from a split vote, a situation that hasn't occurred since 1998.

Those members who did back a hike cited concerns about inflation overshooting its government mandated target of 2% substantially in recent months as their reason for backing a hike, looking beyond the weaker wage growth and consumer spending cited by Carney in Tuesday's speech.

Falling sterling has pushed up the price of importing goods, passing through to everyday items that regular Brits buy. This is now showing up in official inflation data, which at the latest reading sat at 2.9%.

Carney himself, whose vote, it should be noted, has the exact same weight in setting policy as any other member of the MPC, does not believe that spiking inflation will be sustained, especially once the value of sterling begins to recover.

Advertisement

The speech was originally intended to be delivered at the annual Mansion House dinner — one of the biggest events on the social calendar of the British financial industry — last Thursday, but the dinner was cancelled as a mark of respect following the Grenfell Tower disaster earlier in the week. As a result, Carney and Chancellor of the Exchequer Philip Hammond delivered their planned speeches on Tuesday morning instead.

During his speech, Hammond made the case for a "soft Brexit" undermining Prime Minister Theresa May's repeated calls for a "hard Brexit."

At the annual Mansion House event in the City of London on Tuesday, Hammond effectively attacked this path, calling for "a deep and special future partnership with our EU neighbours" that would involve continued trade and immigration.

The pound dropped sharply on Carney's comments, losing close to 0.5% against the dollar, as the chart below illustrates:

pound drop carney
Investing.com
Brexit
Advertisement
Close icon Two crossed lines that form an 'X'. It indicates a way to close an interaction, or dismiss a notification.

Jump to

  1. Main content
  2. Search
  3. Account