BOE governor says Brexit could lead to rising inflation in UK

BOE governor says Brexit could lead to rising inflation in UK

One consistent factor to the Bank of England's (BoE) recent rhetoric, is that the potential of higher United Kingdom interest rates depends on the strength of Britain's economic activity over the coming months. "A rate hike might be needed, but it is unlikely as domestic outlook is softening and real wages are falling".

The BoE governor also said there are global factors that could justify United Kingdom policy tightening soon.

Gertjan Vlieghe, one of the Monetary Policy Committee's staunchest advocates of lower-for-longer interest rates, helped propel the Pound to the top spot in the G10 performance table last week after he too told an audience that the time for a rate hike could be near. Until last week, most economists had expected the Bank to wait until later next year or even 2019 before raising rates.

GBP  USD price chart
GBP USD price chart

In fact, the BoE Governor projects that inflation will remain above the 2% policy threshold for the next three years.

Global equity markets closed out the week mixed - Dow +0.29%, S&P 500 +0.18%, FTSE -1.10%, DAX -0.17%, CAC Closed%, Nikkei +0.52%, Shanghai -0.53%.

The governor made the comments in a speech to the International Monetary Fund in Washington DC on Monday.

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He added: "Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy". Businesses had also invested much less aggressively, and these twin effects had caused economic growth to slow in the first half of the year.

Although Carney expects any reduction in met migration after Brexit to have only a modest impact on prices, he warned that over a shorter horizon "abrupt decreases in migration could result in shortages in some sectors that have become reliant on migrant labour, and contribute more materially to inflationary pressures".

Carney warned and added that there remains "considerable risks" to the outlook for the United Kingdom economy.

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But he also diffuses another argument - that Britain would be able to offset any loss of trade ties with the European Union by striking new agreements with other countries, as it will take time for businesses to adapt to any new rules.

Some of Carney's comments were interpreted as more dovish in the wake of last week's MPC statement, reinforcing the view that the rate-hike cycle in the United Kingdom will be very shallow-or "limited and gradual", to use Carney's phrase.

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