Pedestrians pass in front of the Bank of England (Photographer: Jason Alden/Bloomberg)

Carney Hikes Rate in What May Be Final Pre-Brexit Push

(Bloomberg) -- The Bank of England raised its benchmark interest rate to the highest level since 2009 in what may be its final blow against inflation before the U.K. leaves the European Union.

Governor Mark Carney played down concerns that Brexit may be disorderly and said mounting price pressures warranted Thursday’s quarter-point increase to 0.75 percent. At the same time, he gave no indication that policy makers see a need to accelerate the path of rate hikes. The pound slid.

Carney Hikes Rate in What May Be Final Pre-Brexit Push

BOE policy makers are trying to strike a balance between taming inflation as the economy runs out of slack, and protecting against the risk that the nation’s Brexit talks will end in a hard rupture that hits growth. Carney himself noted that the negotiations are entering a “critical period” and that the BOE is prepared for all scenarios.

“It’s very unlikely that the conditions over the next six to eight months will warrant another move in monetary policy,” said Dean Turner, U.K. economist at UBS Wealth Management. “If anything, the news flow on Brexit could get more feisty in the short term so this probably is it for the time being.”

The BOE’s reading of market rates now signals that another 25-basis-point increase isn’t likely until the first quarter of 2020, compared the third quarter of 2019 seen in the previous round of forecasts.

Carney Hikes Rate in What May Be Final Pre-Brexit Push

The pound slid as much as 0.9 percent and was down 0.5 percent at $1.3063 as of 2:55 p.m. London time.

Most economists surveyed by Bloomberg had predicted Thursday’s rate hike, though the unanimous 9-0 vote came as a surprise. At least some dissent was expected after Jon Cunliffe, who oversees financial stability, called for caution in tightening policy.

Carney Hikes Rate in What May Be Final Pre-Brexit Push

Carney, who had argued that a slump in growth in the first quarter would prove temporary, said it would be wrong to be put too much emphasis on unknowns.

“We can’t be handicapped or tied by the range of Brexit possibilities,” he said. “The mistake is to always wait wait wait until you have perfect certainty.”

What Our Economists Say

“The problem is so much hangs on the outcome of Brexit negotiations. All options remain on the table but if, as we expect, the U.K. manages to secure a deal, another hike is likely in May next year.”
-- Dan Hanson and Jamie Murray, Bloomberg Economics. See their U.K. REACT

The BOE decision came a day after the U.S. Federal Reserve reiterated that it will slowly raising borrowing costs, and a week after the European Central Bank kept to its plan to end its bond-buying program this year. The Czech central bank raised interest rates on Thursday for the fifth time in a year. At the same time, the Bank of Japan has strengthened its commitment to an ultra-loose policy.

The Equilibrium Rate

For the first time, BOE officials also published their estimate of the equilibrium interest rate -- known as r* -- the rate at which policy is neither accommodative nor tight.

The long-term trend of that rate is seen as having fallen by more than 2 percentage points since 1990, with shorter-term factors driving it temporarily even lower. The bank didn’t put a number on what r* is now -- beyond that it’s being pushed below a 2-3 percent range -- and Carney said the indicator is “as obscure as Brexit is prominent.”

In the Inflation Report accompanying the decision, the BOE kept its economic-growth predictions for Britain broadly unchanged. The U.K. expansion is expected to be just 1.4 percent this year, though it’ll average about 1.75 percent a year through 2020, slightly above the 1.5 percent long-term potential.

The forecasts see inflation slipping to 2.2 percent in 2019 from an average of 2.3 percent this year before settling at the goal in 2020.

The central bank said that if the economy grows as expected, “an ongoing tightening of monetary policy over the forecast period would be appropriate” but Carney repeated its phrase that rate hikes will be limited and gradual.

“I agree with markets,” said Samuel Tombs, an economist at Pantheon Macroeconomics. “They’ll fit one more in before he leaves, probably in May next year, at which point we should have some clarity over Brexit. In the meantime, I think the MPC will be very cautious.”

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