Bank of England says interest rates should be kept on hold amid Brexit uncertainty – The Guardian
Mark Carney said he would want to see how businesses, financial markets and consumers reacted to the reality of the UK’s looming departure from the EU before changing his view.
The governor, who attracted criticism from Conservative MPs for the recession warnings he issued before last summer’s referendum, said the Brexit talks would have a significant bearing on whether the UK’s historically high balance of payments deficit would become more sustainable.
In his delayed speech to the City of London’s elite at Mansion House, Carney explained why he was one of five of eight members voting for no change in borrowing costs.
“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 [to higher rates].
“In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
Carney said financial markets had started to adjust to the post-Brexit world.
“Depending on whether and when any transition arrangement can be agreed, firms on either side of the channel may soon need to activate contingency plans”, he said. “Before long, we will all 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 said in a global economy marked by a clear divide between surplus and deficit countries, the UK’s current account was deeply in the red.
“On the positive side, the deficit is funded in domestic currency and financial reforms have increased the resilience of the UK system, thereby making larger imbalances more sustainable. But the UK’s deficit has also been associated with markedly weak investment and latterly with rapid consumer credit growth. This is not an imbalance that is, as yet, funding its eventual resolution.
“Moreover, despite the large depreciation around the referendum, the extent to which the UK’s deficit has moved closer to sustainability remains an open question, one whose answer depends crucially on the outcome of the Brexit negotiations.
“Most fundamentally, the UK relies on the kindness of strangers at a time when risks to trade, investment, and financial fragmentation have increased.”