Interest rates could go either way

Consumer borrowing and “Brexit-related uncertainties” will determine whether or not the Bank of England’s MPC decide to raise interest rates, according to Governor Mark Carney.

Speaking at the London School of Economics yesterday, Carney said: “It remains the case that the outlook for inflation will depend on the evolution of the prospects for demand, supply and the exchange rate. Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”

He stressed that consumer borrowing had accelerated notably as “households appear to be entirely looking through Brexit-related uncertainties”.

In the year to November, total household borrowing rose 4%, and consumer credit rose over 10%, the fastest rate since 2005.

Carney said how household spending evolves will be important considerations over the next year and that the MPC will continue to monitor these dynamics.

He added that the challenge facing the MPC can be more significant in exceptional circumstances where “shocks to the economy may be particularly large or the effects of shocks may persist over an extended period or both”.

Carney continued: “In November, the MPC reiterated that we were choosing a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment. But it also noted that there are limits to the extent to which above-target inflation can be tolerated.

“Those limits depend on the cause of the inflation overshoot, the extent of second-round effects on inflation expectations and domestic costs, the scale of the shortfall in economic activity below potential, and any risks around the development of imbalances that could threaten a sustainable return of inflation to the target.

“Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally. The MPC will monitor developments in the light of its inflation tolerance, and will explain its assessment and policy stance accordingly.”

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Written by: Houseladder