26 January 2018

Financial Times: UK interest rate rises tied to Brexit talks, BoE signals

He said in Davos that the ability of the UK economy to grow — plus the future direction of the exchange rate, trade costs and spending — would hinge significantly on the talks with the other 27 EU member states, and those negotiations would influence the level of interest rates.

With British economic growth estimated at 0.5 per cent in the fourth quarter of 2017 by the UK statistics watchdog on Friday, above most economists’ expectations, there are rising expectations that the BoE will increase interest rates sooner rather than later this year. [...]

Speaking to the BBC, he said Britain’s vote to leave the EU had already removed about 1 per cent from the UK economy — lost output of more than £350m a week — compared with previous BoE forecasts, and that gap was likely to rise to 2 per cent by the end of 2018.

But he said there was still scope for the economy to perform better and join in an acceleration of global growth.

Using a variant of a phrase coined by the actress Gwyneth Paltrow, Mr Carney said greater clarity over Britain’s relationship with the EU could assuage business fears and lead to a “conscious recoupling” of the UK with the improving global economy if Brexit negotiations led to a close alignment between the UK and the EU.

“The deeper the relationship with Europe, the deeper the relationship with the rest of the world, and the two are obviously connected . . . the better it’s going to be over time for the UK economy,” he added.

Mr Carney outlined how much he thought UK growth depended on the Brexit negotiations producing an outcome that amounted to little change in the relationship between Britain and the EU compared with the present.

“Over the course of the next year, as the negotiations with the EU27 progress, we’re going to find out a lot more about what the supply capacity of the economy is in the near term, what the right level of the exchange rate should be, whether or not there will be tariff or other trade costs and how all of this affects demand,” said Mr Carney on a Davos panel. “It is all of those factors together that determines the appropriate stance of monetary policy.”

The governor added, however, that even if there was a disorderly Brexit that was bad for the UK, regulations put in place by the BoE “would allow the [financial] system to withstand the shock”. [...]

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