Or perhaps a better title might be “Through a crystal ball foggily” as Carney’s predictions about the state of the UK economy going forward are dependent on a “Brexit deal” that has yet to even start to be discussed. However, the Governor of the Bank of England is required to make economic projections and you can only go with what you know.
The Bank of England has increased its projection for inflation for 2017 from 2.4%, predicted in February, to 2.7% currently. This is significantly above the Bank’s target inflation figure of 2%. As a consequence of this, Mark Carney is predicting that there will be a squeeze on consumer spending since wage increases are likely to come in below the level of inflation, causing a decrease in disposable income for UK households.
The Bank has also trimmed its expectations for growth of the UK economy this year from 2% to 1.9%. However, it has left interest rates at their historically record low rate of 0.25%. Conventional wisdom suggests that a rise in interest rates would choke off inflation, by curbing domestic spending, but Carney has attributed the decline in the value of Sterling since the Brexit vote as a major factor in the increased inflation figure. Whilst boosting UK interest rates would strengthen the Pound somewhat, it would not reverse the significant decline in Sterling since June which, despite a rally following the call of a UK general election and the victory of Emmanuel Macron in the French presidential election, is still 12% down against the Dollar against its pre-referendum level. Sterling has fallen from a pre-vote value of $1.47 to stand at about $1.29 currently.
Carney was upbeat on wage growth after 2017, but couched his optimism in terms of the UK securing a “smooth” Brexit. By smooth, Carney means that the UK will get: "an agreement about future trading arrangements and there will be a transition, or an implementation period, from the negotiation to that new agreement". At the moment, it is not even certain if the government of the day will be negotiating Brexit although most political analysts are expecting Mrs May’s government to be re-elected with a larger majority when the UK goes to the polls in 4 weeks.