Bank of England's Carney
faces up to pressure from prices and politics
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[October 24, 2016]
By David Milliken
LONDON
(Reuters) - Two of the biggest bugbears for any central banker -
political pressure and an impending surge in inflation - now loom larger
over Bank of England Governor Mark Carney than at any time since he took
over the central bank.
After rushing to stabilize Britain's economy in the weeks after June's
vote to leave the European Union, including the BoE's first rate cut
since 2009, Carney faces a more nuanced but no easier task next week,
when he will explain the Bank's latest thinking on the impact of the
Brexit vote.
A further cut in rates on Nov. 3, which was signaled by the Bank as
recently as September, now looks unlikely because the economy seems to
be slowing less than the BoE feared.
Moreover, a renewed lurch down in sterling to a fresh 31-year low
against the dollar will push the central bank to jack up its inflation
forecast to show a bigger overshoot of its price target than any time
since it gained independence in 1997.
However, Carney will probably keep alive the prospect of further
monetary stimulus in case of weaker growth, even after Prime Minister
Theresa May issued the government's sharpest criticism of BoE action
since the financial crisis.
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"They may not cut rates in November, but I don't think that takes a rate
cut - eventually - off the table," said Jeremy Lawson, chief economist
at fund manager Standard Life Investments. "Things are still fragile and
there are plenty of opportunities when growth could weaken."
Added to the mix is uncertainty about Carney's future. Hand-picked as
governor four years ago by the now-fired finance minister George
Osborne, Carney has said he will announce by the end of the year if he
will take up an option to stay an extra three years at the BoE or leave
as planned in mid-2018.
CARNEY PRESSURE
Many supporters of Britain's exit from the EU strongly objected to
Carney's warnings of the economic risks of Brexit in the run-up to the
referendum.
Then, earlier this month, Prime Minister May said low interest rates had
"bad side effects" for savers, even if it had been needed as emergency
medicine after the global financial crisis.
Whether this was intended as a shot across the BoE's bows is unclear.
Carney himself has acknowledged ultra-loose monetary policy
redistributes wealth in a way the government may want to tackle. But the
Canadian also felt it necessary to say he would not "take instruction"
over policy.
Carney will probably try to steer the focus away from politics and back
to the economy next week when he will acknowledge the more muted
immediate Brexit hit to the economy than the BoE initially expected.
When it cut rates to a record-low 0.25 percent, restarted its
bond-buying program and took other stimulus measures in August, the Bank
said it expected to cut rates again this year if the economy developed
in line with its forecasts.
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![](../images/102416pics/busine35.jpg)
Bank of England Governor Mark Carney speaks at the Future Forum in
Birmingham Town Hall, in Britain, October 14, 2016. REUTERS/Chris
Radburn/Pool
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Despite the economy proving more resilient than expected to the immediate Brexit
shock, some BoE policymakers may still think the medium-term outlook is dark
enough for a further rate cut to 0.1 percent.
Surveys have suggested a fall in business investment, one of the main channels
through which the BoE expects the Brexit vote to crimp future economic expansion
- though there will be a lack of hard data in time for November's decision.
Another factor which may encourage policymakers to hold off include finance
minister Philip Hammond's Nov. 23 mid-year statement - though the signs are he
will wait until the main annual budget in March before making big changes.
The
other big challenge to a rate cut is the fragility of sterling. This has fallen
8 percent since August, making an upward revision to the BoE's inflation
medium-term forecast almost inevitable, unless the central bank takes a
distinctly more gloomy view of Britain's economic prospects.
In August, the BoE forecast inflation would hit its 2 percent target in around a
year and then overshoot to 2.4 percent for the following two years, while growth
would slow to 0.8 percent next year before recovering to 1.7 percent in 2018.
That said, the BoE typically views currency-driven overshoots in inflation as
temporary and tolerable, as it did with even sharper spikes in inflation in the
years after the financial crisis.
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"I don't see the more dovish core of the committee being too concerned about the
inflation outlook," Lawson said.
(Reporting by David Milliken; Editing by Toby Chopra)
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