UK Interest Rates Likely to Rise Over Coming Months


The withdrawal of monetary stimulus is likely to be appropriate over the coming months, if the economy and price pressures keep growing, Bank of England Governor Mark Carney said in a speech at the IMF on Monday. Still, there are considerable risks to the UK outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal, he added.

Excerpts from Bank of England Governor Mark Carney speech at the IMF:

On balance, the de-integration effects of Brexit can be expected to steepen the Phillips Curve and to be inflationary. At present, the main question concerns the extent to which this adjustment has been brought forward. 

The latest indicators are consistent with UK demand growing a little in excess of the diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. If anything, recent developments suggest that the remaining spare capacity in the economy is being absorbed a little more rapidly than had been expected, and that inflation remains likely to overshoot the 2% target over the next three years.

The MPC’s reaction function is clear. The continued erosion of slack lessens the trade-off that the MPC is required to balance and, all else equal, reduces the MPC’s tolerance of above-target inflation.

As the Committee stated last week, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.

The case for a modest monetary tightening is reinforced by the possibility that global equilibrium interest rates may be rising, meaning that monetary policy has to move in order to stand still.

Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy.

There remain considerable risks to the UK outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal. The MPC will respond to these developments as they occur insofar as they affect the behaviour of households and businesses, and the outlook for inflation. 

BoE | Joana Ferreira | joana.ferreira@tradingeconomics.com
9/18/2017 3:39:37 PM