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UK's Supply Capacity Likely To Expand At Moderate Rates, Says Carney

UK's Supply Capacity Likely To Expand At Moderate Rates, Says Carney

United Kingdom inflation is "likely to overshoot the 2% target over the next three years", according to Bank of England Governor Mark Carney.

Carney added that, in the long term, high levels of migration were not responsible for subdued wage growth, but his speech is likely to have pleased pro-Brexit MPs, who have long campaigned for tighter immigration controls.

All of those have implications for the economy and monetary policy. United Kingdom inflation rate hit 2.9 percent in August, well above its target of 2 percent. The report explains that interest rates are rising for the first time in roughly a decade, and will allow the United Kingdom to curb inflation and encourage consumption and fixed-investment. CEBR's revision is motivated by last week's BOE statement saying they are weighing raising base borrowing costs from the current ultra-low 0.25 percent, as macroeconomic data is providing a better foundation than expected earlier.

He reiterated the BOE's message that interest rates may need to rise "within months" to keep a lid on price growth, after annual inflation hit 2.9% in August, well in excess of the BOE's 2% target. The pound has risen to $1.35, which is very close to its pre=Brexit vote gauge of $1.41-1.60, compared to the slump down to as low as $1.16 last summer.

Brexit-related uncertainties have forced some companies to delay their investment decision, he said in a speech at the International Monetary Fund.




In remarks prepared for delivery in Washington, Carney said that Britain's planned departure from the European Union in 2019 is already fueling faster inflation in the United Kingdom as weak investment and falling immigration restrain the economy's capacity to expand.

"On balance, the de-integration effects of Brexit can be expected to.be inflationary", he said.

He also asserted that any potential United Kingdom interest rate hikes were likely to be gradual and limited. Economic growth slowed in the first half of the year and inflation has accelerated to nearly 3%. Consequently, he concluded "as a result of these factors and the general weakness in United Kingdom productivity growth since the global financial crisis, the supply capacity of the United Kingdom economy is likely to expand at only modest rates in coming years".

Some of Carney's comments were interpreted as more dovish in the wake of last week's MPC statement, reinforcing the view that the rate-hike cycle in the United Kingdom will be very shallow-or "limited and gradual", to use Carney's phrase.

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