Mark Carney reaffirmed that the Bank of England is close to its first interest-rate increase in over a decade, as inflation hit 3% and one of his colleagues said the economy is approaching a “tipping point.”
In a series of testimonies to lawmakers, the BoE governor and the two newest members of the rate-setting Monetary Policy Committee signalled that the erosion of economic slack is dominating their thinking as they prepare for a November 2 decision. The appearances coincided with reports showing consumer prices rising at the fastest pace since April 2012.
“Having used up more spare capacity, having seen some evidence of building domestic pressures, the judgment of the majority of the committee is some raise in interest rates over the coming months may be appropriate,” BoE governor Mark Carney said.
The central bank is widely forecast to raise the benchmark rate at its November meeting, though Carney — in line with earlier comments — declined to be that specific. The pound fell for a second day against the dollar, trading down 0.5% at $1.3188 at 1:24pm London time.
The BoE chief admitted that while consumer-price growth is close to peaking, it is more likely than not to accelerate again this month. That would put it more than a full percentage point above the central bank’s 2% target, meaning Carney will have to write a public letter of explanation to the Treasury.
A chief concern is that the economic slack that can dampen price pressures may soon be eroded. Unemployment is at a 42-year low and uncertainty caused by Brexit — which Carney repeatedly referred to — threatens to constrain output. Monetary Policy Committee member Silvana Tenreyro said in her testimony that the BoE may soon need to act.
“My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus,” she said. “If the data outturns are consistent with the picture I just described, of an output gap going towards zero, then I’d be minded to vote for a bank rate increase in the coming months.”
Even so, the hearing at the Treasury Committee — which was the first opportunity to hear the views of the Tenreyro and newest MPC member Dave Ramsden — underlined that differences remain in the group’s thinking.
“I still think there is some slack in the economy,” Ramsden said, noting that he wasn’t part of the majority of policy makers at the September meeting that saw a likely need for higher interest rates soon. “I’m going to approach each MPC meeting as it comes.”
Carney’s testimony was his first since February, in which time the UK’s negotiations to leave the European Union have made little traction. The governor’s interactions on the topic with the Treasury Committee were less tempestuous than his exchanges in recent years. Vocal pro-Brexit lawmakers Jacob Rees-Mogg and Steve Baker — who criticised his comments and policy around the time of the referendum — have left the panel, which is now chaired by ‘Remain’ supporter Nicky Morgan.
The BoE head said the two-year Brexit transition agreement advocated by the British government would be long enough to provide continuity for banks and investment firms as long as it ensures no break in cross-border services.
That would be “sufficient time, particularly if we get what I would call, if I’m allowed to use an adjective, a reasonable agreement on the end state,” he said.
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