Bank of England governor Mark Carney has said that now is not the time for an interest rate hike, while wages continue to stagnate and the impact of Brexit on the economy is unclear.
Speaking after three Bank policymakers called for a rate rise amid warnings that Brexit-fuelled inflation is set to surge further over the summer, Carney said that “now is not yet the time to begin that adjustment”.
• READ MORE: Sterling surges as BoE moves closer to rates hike
Delivering his delayed Mansion House speech, Carney said: “Different members of the monetary policy committee will understandably have different views about the outlook and therefore on the potential timing of any Bank rate increase.
“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 said he would like to see if falling consumer confidence is offset by other components of demand, whether wages begin to “firm”, how the economy reacts to “tighter financial conditions”, as well as the reality of Brexit negotiations, before considering any rate hike.
Last week the MPC kept interest rates on hold at 0.25 per cent, but Ian McCafferty, Michael Saunders and outgoing member Kristin Forbes all voted for a rise to 0.5 per cent, marking the first time three members have dissented for more than six years.
• READ MORE: Holiday costs push inflation towards four-year high
It came after inflation hit 2.9 per cent in May – its highest level in nearly four years and far higher than expected.
The pound sank on the news, falling 0.4 per cent against the dollar and euro to $1.26 and €1.13 respectively.
On Brexit, the governor said Britain’s divorce from the block is set to result in “weaker real income growth”, job losses and price rises, but added that monetary policy has limited power to prevent economic weakness.
“Since the prospect of Brexit emerged, financial markets, notably sterling, have marked down the UK’s economic prospects.
“Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU.
“But it can influence how this hit to incomes is distributed between job losses and price rises.”
The country will soon “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.
The governor also waded into the row over euro-clearing after the EU released proposals that could force operators to leave London as a result of Brexit, putting the capital’s multibillion-pound industry at risk.
“The UK houses some of the world’s largest CCPs (central counterparty clearing houses),” he said.
“Fragmentation of such global markets by jurisdiction or currency would reduce the benefits of central clearing.”
• READ MORE: Stripping City of euro-clearing would be ‘political’
He also added his voice to concerns that wrenching clearing from London would result in higher costs, which would “ultimately be passed on to European households and businesses”.
However, Carney welcomed parts of the proposals that would see co-operation arrangements between the EU authorities and their overseas counterparts, including potential provisions for deference to the rules to which a clearing house is subject in its home jurisdiction.
• The Chancellor has appointed London School of Economics (LSE) professor Silvana Tenreyro to the MPC, writes Ben Woods.
Tenreyro is to replace Kristin Forbes, who will step down from the rate-setting committee at the end of this month.
The MPC, which decides on the path of UK interest rates, had dropped to just eight members from the usual nine after Bank deputy governor Charlotte Hogg was forced to resign in March for failing to declare that her brother works for Barclays.
• READ MORE: Charlotte Hogg resigns as BoE deputy governor
Chancellor Philip Hammond said: “I am confident that Professor Tenreyro will be a strong addition to the MPC, bringing a wealth of economic experience and academic rigour to the committee’s deliberations.”
Tenreyro will join the Bank as an external MPC member on 5 July and will be eligible to cast an interest rates vote during the committee’s meeting in August.
Martin Beck, lead UK economist at Oxford Economics, said it was unclear what Tenreyro’s views were on UK monetary policy.
But he said the latest MPC recruit, who has British, Argentinian and Italian citizenship, was likely to “shift the MPC’s balance in a dovish direction”.