The Bank of England has responsibility for ensuring that inflation in the UK economy is maintained at a healthy level. The target inflation value is 2%, but currently UK inflation is 2.9%, well above the target. In usual circumstances, the Bank would seek to “cool” the economy by raising interest rates and so constraining the money supply by making borrowing more expensive. However, a key component in current UK inflation is due to the devaluation of Sterling following the Brexit vote which induces inflation by pushing up the price of imported goods.
Speaking at The Mansion House, the Governor of the Bank of England took a Bearish stance on an interest rate hike, against the back-drop of the newly commenced Brexit negotiations with the EU. Carney noted that: "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 . 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."
UK wage growth has fallen below inflation which means that consumers’ spending power has been reduced, a similar effect to an interest rate hike.
Mr Carney pointed out that businesses on both sides of the Channel would soon need to activate Brexit contingency plans. "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. cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU", he said, but it could influence how "the hit to incomes is distributed between job losses and price rises".
Sterling reacted badly on Forex markets to the Governor’s comments, slipping by 0.4% against the Dollar to stand at $1.2682 following the speech and currently is trading at $1.2627.