Bank of England governor Mark Carney has said a transition agreement for EU withdrawal is in “everyone’s interest” and reiterated it may be “appropriate” to hike interest rates as Brexit-fuelled inflation is set to rise further.
Mr Carney told MPs that policymakers on the Bank’s Monetary Policy Committee (MPC) believed a rise in interest rates may be needed over the “coming months” as it looks to tackle surging inflation caused by the weak pound.
But his comments sent sterling lower, with investors taking it as a sign that the Bank’s first rate hike in decades could come later than predicted.
Economists have been pencilling a rate hike in November, when the Bank’s next decision and latest set of forecasts are due.
Mr Carney said: “Having made progress over the last 14 months, the economy having created almost 400,000 jobs… having used up most spare capacity, having seen some early evidence of building domestic pressures, the judgement of the majority of the committee is that some raise in interest rate in coming months may be appropriate in order to have that sustainability.”
The pound was down nearly 0.5% against the US dollar in afternoon trading at 1.318 and down 0.1% versus the euro at 1.121.
The currency was also hit by dovish signals from Mr Carney’s newly appointed colleagues who appeared in front of the Treasury Select Committee on Tuesday.
Sir Dave Ramsden, deputy governor for markets and banking at the Bank of England, said that he voted to maintain interest rates at 0.25% in September and “wasn’t in the majority” among MPC members who saw the case for potentially removing some monetary stimulus in the near future.
Recently appointed policymaker Silvana Tenreyro – who also voted to keep rates on hold – went on to agree with previous warnings made by fellow MPC members over the impact of a “premature” rate hike on the economy, while Brexit uncertainty still weighed on the outlook.
She said: “Premature increases will require a lot more cuts in the future to recover that ground lost.”
“If that’s a mistake, that can be costly,” she added.
During his own hearing, Mr Carney also stressed the importance of avoiding a so-called hard Brexit without arranging a transition agreement.
While the Bank has been preparing for the possibility, he said there had been “much less” preparation by the EU and member firms.
He said: “There’s a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities.
“A transition agreement is in everyone’s interests.”
Mr Carney also warned that some wholesale banks would likely shutter in light of the high cost of relocating from the UK to the EU after Brexit.
“There will be cases, there are cases where they will shut down the business as opposed to shift it. The economics don’t work and that’s unfortunate and that’s a net loss for everybody concerned.”
Businesses and consumers alike have been dealing with Brexit’s effect on the pound, which has sent inflation to a five-year high of 3%.
The central bank boss said that figure could rise further in October or November, meaning it is “more likely than not” he will have to write a letter to the Chancellor explaining why inflation is more than 1% above target.
Inflation is expected to ease back after the autumn peak, but Mr Carney warned that the MPC expects the effect of the Brexit-hit pound to keep inflation above the 2% target for three years.
Treasury committee member Alister Jack asked whether it was “unnecessary” to cut interest rates to a record low of 0.25% in the wake of the Brexit vote, and questioned whether it would have been better to raise rates in the hope of supporting the pound.
“No, I wouldn’t agree at all,” Mr Carney said.
“The movement in the pound… has largely been determined by the prospects for that trade and investment deal with the European Union and has fluctuated largely around both the expectations of the scale of the deal, and the timing of that deal.”