Rate Hikes – Gradual and Limited

September 21st, 2017

Bank of England governor Mark Carney has said he expects interest rate increases in the UK to be “gradual” and “limited” as he estimated inflation would remain above 2% for the next three years.

In a speech to the International Monetary Fund (IMF)in Washington DC, Carney said there would likely be “some withdrawal of monetary stimulus” in order to bring inflation back to the BoE’s 2% target, according to the BBC.

Inflation beat expectations in August rising 0.3% to 2.9%, its highest since 2012, as it continued to feel the effects of the sterling devaluation following the UK’s vote to leave the European Union last year

In the Monetary Policy Committee last week, the MPC held rates at 0.25% but minutes revealed “slightly stronger than anticipated” UK economic growth could lead to a rate hike.

Carney said last week: “A withdrawal of part of the stimulus that the committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.”

Brexit woes

In his speech to the IMF however, the governor cautioned that Brexit was a “real shock”, which could lead to a squeeze on the UK consumer as the sterling devaluation was resulting in higher prices.

He said it was a risk monetary policy could “do little” and added there were “considerable risks” to the UK economy outlook, but said a strong economy in the medium-term would be most influenced by the country’s relationship with the EU.

“Brexit-related uncertainties are causing some companies to delay decisions about building capacity and entering new markets,” Carney said.

“Prolonged low investment will restrain growth in the capital stock and increases in productivity.

“Many of the adjustments needed to move to that new equilibrium are real in nature, and are not in the gift of monetary policymakers.

“But monetary policy can help build the foundations for lasting prosperity by achieving the inflation target in a way that helps smooth real adjustment in the economy and supports jobs in the wake of very large external forces.”

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