Bank of England governor Mark Carney addresses the Bank's quarterly inflation report news conference in London, the UK, May 2 2019. Picture: CHRIS RATCLIFFE/BLOOMBERG
Bank of England governor Mark Carney addresses the Bank's quarterly inflation report news conference in London, the UK, May 2 2019. Picture: CHRIS RATCLIFFE/BLOOMBERG

London — Bank of England (BoE) governor Mark Carney says investors are underestimating how much the central bank could raise interest rates even as it kept borrowing costs on hold on Thursday due to Brexit uncertainty.

The BoE said there was little immediate risk from waiting for a clearer view of what Britain’s departure from the EU would mean for the economy and its nine rate-setters all voted to keep its benchmark rate at 0.75%.

But Carney made clear his view that investors were too relaxed about the pace at which the BoE could resume its gradual rate increases to ease Britain off the stimulus of low borrowing costs that has been in place for more than a decade.

“There are insufficient hikes in the current market curve to be consistent with our remit,” he told reporters.

The BoE’s position that higher borrowing costs will be needed in future represents a more hawkish stance than either the US Federal Reserve or the European Central Bank.

The BoE upgraded its forecast for growth in the world’s fifth-largest economy to 1.5% , up from the decade-low 1.2% it predicted in February, largely reflecting better global economic prospects.

GDP growth upturn

“The underlying path of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential,” the BoE said.

Sterling whipsawed after the central bank’s announcement and as Carney began a news conference but was largely in line with its level of earlier on Thursday at around $1.3050.

During the first quarter of 2019 the economy probably grew by 0.5% due to businesses building up stocks ahead of Brexit, the BoE said — a faster rate than the 0.2% growth it forecast in February. However, the central bank expects growth to slow to 0.2% during the current quarter.

Britain’s departure from the EU, originally due for March 29, was delayed in April until October 31, unless parliament approves a deal sooner. This removes the immediate risk of a disruptive, no-deal Brexit which hung over the BoE at its last meeting in March, but extends a period of economic uncertainty.

The BoE said this made some economic data, such as business surveys, harder than normal to interpret.

“More generally, there remained mixed signals from indicators of domestically generated inflation and the cost of waiting for further information was relatively low,” the BoE said, adding it continued to assume Brexit would go smoothly. British inflation is currently just below its 2% target, but unemployment is at its lowest in more than 40 years, while wages are rising at their fastest rate in a decade.

Before Thursday’s decision, financial markets saw only a 35% chance of a rise in 2019. The BoE has raised interest rates only twice since the 2008 financial crisis, in November 2017 and August 2018.

“The committee continues to judge that ... an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate,” the BoE said, echoing earlier language.

The BoE’s tightening stance contrasts with the position of the US Federal Reserve, which on Wednesday said it saw no case for moving rates in either direction, and faces pressure to lower interest rates from President Donald Trump.

Updated BoE forecasts show the central bank expects inflation — currently 1.9% — to exceed its 2% target in two and three years’ time, by a similar margin to what it predicted in February. The forecasts are based on financial market pricing which assumed BoE interest rates would not reach 1% until late 2021 — around 15 basis points less in tightening than was priced in just before February’s BoE meeting.

The BoE said that after three years, the economy would be overheating to a greater extent than it forecast in February if interest rates only rose to 1% , and that inflation would be higher if sterling had not recently strengthened.

It also cut its forecast for unemployment sharply to 3.7% in two years’ time, down from 4.1% in February, reflecting businesses’ preference to hire staff, rather than make long-term investments, at a time of economic uncertainty.