Bank of England's Carney sees Brexit pushing up inflation, rate rise likely

Jon Howard
September 21, 2017

Bank of England governor Mark Carney has told the International Monetary Fund (IMF) that United Kingdom interest rates are likely to rise soon, though the increase will be "gradual and limited".

When the impact of inflation is factored in, real weekly wages fell by 0.4%, both including and excluding bonuses, compared with a year earlier.

Disappointing US economic data releases has seen the Dollars slump against all its rivals, with the GBP once again the strongest performer as investors continue to price in an expected interest rate hike from the BOE.

In his speech to the International Monetary Fund however, the governor cautioned that Brexit was a "real shock", which could lead to a squeeze on the United Kingdom consumer as the sterling devaluation was resulting in higher prices.

He went on to say though that "any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent".

The CEBR says that inflationary pressures will ease, in line with rising interest rates, while a deal with the European Union, when it's finally reached, will ease the uncertainty and propel the economy beyond next year.

The Governor pointed out that the fall in income would be inevitable, as households are now cutting down on consumption and spending, "slowing the economy".

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In his speech, Mr Carney also discussed the impact of globalisation, demographics and technology on the world economy and monetary policy.

The market pricing sees a 73 per cent chance of a rate increase in November this year, with an increase in interest rates by March now fully priced in. Consequently, he concluded "as a result of these factors and the general weakness in United Kingdom productivity growth since the global financial crisis, the supply capacity of the United Kingdom economy is likely to expand at only modest rates in coming years".

He used a French phrase to sum up this view-"reculer pour mieux sauter", or "stepping back in order to jump better".

He said there remains "considerable risks to the United Kingdom outlook", noting how consumers, companies and markets respond to the Brexit process.

The Governor said Brexit was likely to push up inflation in the short term as fewer workers from overseas came to the United Kingdom, making it more hard for employers to recruit and so pushing up wages.

"These latest comments also follow remarks MPC member Gertjan Vlieghe made last Friday". He also said the economy would underperform the Group-of-Seven average through mid-2018.

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