Belfast Telegraph

Interest rates could rise alongside business investment - Carney

The Governor of the Bank of England has hinted that interest rates could rise if wages firm and the economy is boosted by stronger business investment.

Mark Carney said "some removal of monetary stimulus is likely to become necessary", but would depend on whether a drop in household spending is countered by more companies ploughing money back into their businesses.

Sterling jumped by 1% to 1.29 versus the US dollar on the news, with Mr Carney's comments proving more hawkish compared to his Mansion House speech last week when he said "now is not yet the time to begin that adjustment".

Speaking at the European Central Bank (ECB) Forum on Central Banking in Sintra, Portugal, he said: "Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC (Monetary Policy Committee) continues to lessen and the policy decision accordingly becomes more conventional.

"The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations.

"These are some of the issues that the MPC will debate in the coming months."

While outlining that the Bank could not prevent a potential blow to household incomes caused by Britain moving to new trading arrangements with Europe, he said it could influence how the impact is balanced between job losses and price rises.

He also used the speech to stress that the MPC's tolerance was limited when it came to inflation sitting above the Bank's 2% target.

The cost of living hit its highest level in nearly four years at 2.9% in May, with the Bank expecting inflation to peak at 3% by the autumn.

Consumers have started to tighten their belts as inflation's upward march far outstrips wage growth.

Andy Haldane, the Bank's chief economist, surprised markets last week by signalling that he was poised to vote for a rate hike in the second half of the year if growth remains stable.

Three out of eight MPC members unexpectedly voted to raise rates to 0.5% earlier this month from their record low of 0.25%, due to concerns over soaring inflation.

However, t he Bank's deputy governor Jon Cunliffe appears to be more cautious about the prospect of a rate rise, telling BBC's Radio 5 Live on Wednesday that he wanted to see if Britain's growing export trade and increases in business investment could offset a slowdown in consumer spending.

He said: "(Consumer spending) is slowing as households' real incomes are squeezed by higher inflation, we expect some of that slowing to be offset by growth in business investment, growth in exports. And I want to see how that plays out."

Howard Archer, chief economic adviser to EY Item Club, said the MPC was still likely to hold fire on an interest rate rise this year.

He said: "For the time being, the governor still looks to be in wait-and-see mode.

"He wants to see how much other elements of demand including business investment offset weaker consumer spending over the coming months, and whether wages and unit costs start to firm.

"The governor also wants to see how the economy reacts as Brexit negotiations develop, and how smooth (or not) the negotiations are."