Mark Carney warned that U.K. households will face a difficult year, underpinning the Bank of England’s decision to keep interest rates on hold. The pound fell.
While the BOE governor said policy makers have assumed the U.K.’s departure from the European Union will unfold smoothly, he noted the uncertainties surrounding that process and said real wage growth will remain weak for now.
“This is going to be a more challenging time for households,” Carney said at a press conference in London on Thursday. “Wages won’t keep up with prices for goods and services they consume.”
Sterling fell as much as 0.6 percent to the day’s lows and traded at $1.2855 at 1:19 p.m. London time.
On the upside, the Monetary Policy Committee’s published decision stated that policy makers may need to raise interest rates faster than the market suggests. Carney said he expects real wage growth will eventually pick up, but that there would be “consequences” if it doesn’t.
The MPC kept its benchmark interest rate at a record-low 0.25 percent, though Kristin Forbes dissented again, voting for an immediate increase. Others said it may not take much upside news for them to switch to her position. The MPC was short one member at this decision after Charlotte Hogg left the bank, having resigned after failing to disclose a potential conflict of interest.
The BOE also published revised economic forecasts, based on the assumption that Brexit talks don’t go awry and see the U.K. leave after the two-year negotiation period without transitional arrangements in place. The insights from the Inflation Report are the first in weeks since a snap general election called by Prime Minister Theresa May policy makers into purdah.
Carney said the bank hasn’t tried to gauge what a messier Brexit outcome would look like.
“We would have had to do an alternative forecast with some variant of a disorderly negotiating process, and we have not done that,” he said.
Officials cut their forecast for growth this year to 1.9 percent from 2 percent, though they raised it for the following two years and said expansion will remain around trend over the period. While growth slowed to 0.3 percent in the first quarter, the weakest in a year, the bank expects the figure to be revised up to 0.4 percent. Forbes said the initial reading exaggerated the extent of the slowdown.
Reflecting a weaker pound since last June’s Brexit referendum, the MPC lifted its 2017 inflation projection to 2.7 percent from 2.4 percent, meaning a bigger overshoot of its 2 percent target. The bank sees a slightly weaker path further out but expects inflation to be accelerating again at the end of the three-year forecast period.
The rise in inflation entirely reflects the effects of import prices and weaker sterling, Carney said, adding that it “has been offset to some extent by the continued subdued growth in domestic costs with wage growth notably weaker than expected.”
“The medium-term inflation forecast is lower and that’s why markets have taken it as dovish,” Alan Clarke, an economist at Scotiabank in London, said by telephone. “It signals they’re moving no time fast.”
In addition to the crucial Brexit assumption, the latest forecasts are based on a rate increase not being fully priced in until the end of 2019. In February, the curve had priced in a hike by the first quarter of that year.
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