The Bank of England Governor Mark Carney said investors were underestimating how much interest rates could rise, even as the central bank kept borrowing costs on hold due to Brexit uncertainty.
Sounding more hawkish than the US Federal Reserve and the European Central Bank, Carney warned investors they were being too relaxed about BoE plans to carry on easing Britain off its financial-crisis levels of near-zero borrowing costs. “There are insufficient hikes in the current market curve to be consistent with our remit,” he said, referring to interest rate expectations embedded in financial market prices.
But for now, the BoE said, there was little risk from waiting to see if Britain can leave the European Union later this year without a big shock to the economy. Its nine rate-setters all voted to keep its benchmark rate at 0.75 per cent on Thursday.
Britain’s economy has slowed since the Brexit referendum in 2016 but has fared better than many investors feared. In some ways, it looks ready for what would be only its third interest rate hike in more than a decade. Unemployment is at a 44-year low, wages are growing at the fastest pace in 10 years and consumer spending remains solid.
Carney said the Brexit uncertainty was keeping the appropriate level of interest rates artificially low for now. But markets paid little attention to his blunt message.
The sterling was hardly changed from before the BoE’s announcement and futures priced in less than a one-in-three chance of a rate hike this year — lower than what was factored in before Carney spoke.
“Brexit is really painting the Bank of England into a corner at the moment,” said Luke Bartholomew, an investment strategist at Aberdeen Standard Investments. “But there’s no escaping the fact that the data broadly points towards a rate hike in the not too distant future. If things keep going on at this rate then I think we’ll start to see calls from within the Bank for a hike.”
The Bank of England raised its forecast for growth in the world’s fifth-largest economy to 1.5 per cent, up from the decade-low 1.2 per cent it predicted in February, thanks largely to better prospects for the global economy.