BoE Carney Hints at Summer Stimulus


The Bank of England is prepared to take whatever action is needed to support UK economy and it will likely have to cut interest rates over the summer, Bank of England Governor Carney said in a speech on June 30th. The Bank will also consider a host of other measures and policies to promote monetary and financial stability, he added.

Excerpts from Governor Mark Carney's speech:

In May, the MPC judged that a sustainable return of inflation to the 2% target probably required a gradually rising path for Bank Rate over the next three years as growth picked up, jobs and wages increased and the drags from a stronger currency and lower commodity prices faded.

As required by its remit, the MPC has already described how a vote to leave the EU could materially alter the outlook for growth and inflation.

As a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy.

At the same time, supply growth is likely to be lower over the next three years, reflecting slower capital accumulation and the need to reallocate resources across sectors of the economy. Both of these forces may be exacerbated by higher uncertainty and tighter financial conditions.

Finally, as expected, sterling has depreciated sharply. For given foreign demand, this will mean support to net trade, though this may well be dampened by uncertainty around future trading relationships. A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes.

As the MPC said prior to the referendum, the combination of these influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than set out in the May Inflation Report. In such circumstances, the MPC will face a trade-off between stabilising inflation on the one hand and avoiding undue volatility in output and employment on the other. The implications for monetary policy will depend on the relative magnitudes of these effects.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

The Committee will make an initial assessment on 14 July, and a full assessment complete with a new forecast will follow in the August Inflation Report. In August, we will also discuss further the range of instruments at our disposal.

I can assure you that in the coming months the Bank can be expected to take whatever action is needed to support growth subject to inflation being projected to return to the target over an appropriate horizon, and inflation expectations remaining well anchored. 

BoE Carney Hints at Summer Stimulus


Bank of England | Joana Ferreira | joana.ferreira@tradingeconomics.com
6/30/2016 5:10:44 PM