Mark Carney on interest rate rises, Eurozone weakness and the 2015 general election

 
Lynsey Barber
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Mark Carney talked to the US media today (Source: Getty)

Is Bank of England governor Mark Carney on a media blitz?

He’s already taken the opportunity to tell bank chiefs to face up to new laws which make them legally responsible for any wrongdoing.

And, while attending the annual meeting of the International Monetary Fund in Washington, he’s also given interviews to CNBC and CNN making clear that eurozone weakness and the upcoming general election will have no impact on the Bank of England’s monetary policy.

He reiterated that matters closer to home, in particular the state of the labour market, would have more of an influence on its decisions.

The BoE is keeping a close eye on domestic inflationary pressures as it expects a slight slowdown in the recovery towards the end of 2014, he said - another hint that rate rises are coming later rather than sooner than expected.

This is what IHS analyst Howard Archer has to say on a rate rise: "We have long been expecting the Bank of England to first raise interest rates from 0.5 per cent to 0.75 per cent in February – but there is clearly a very real and mounting possibility that the bank could delay acting until nearer mid-year."

Here’s what Carney told CNN.

We’ll look at all factors in determining the timing. From our perspective what really matters is the medium-term path of policy.
Let me go to recent developments. Certainly a topic of discussion this week at the IMF meetings has been a broader-based weakness in both emerging markets and in Europe, Europe being the largest export markets for the UK, so it’s something we watch closely and have been watching closely. We take that into account obviously.
As we update our forecasts, and update our thinking about where we move policy, begin to normalise policy. But I would underscore what has been driving the UK recovery has been domestic factors. It’s been consumption, its been strong business investment growth, growing at 10 per cent, adjustments in the housing market, those are the factors that have been driving it.
What we’re looking at is not just what's happening internationally, but where are domestic inflationary pressures coming from and where are they likely to go. in that regard we’re focusing particularly on slack in general but the labour market in particular.
Is the middle of next year still a realistic idea for normalisation?
We live in a data dependent world. For November we’ll have an updated forecast which will give a sense of how the interplay between changes in financial conditions, where there’s been some movement in exchange rates, some other factors, to what extent they offset weakness abroad and to what extent does the modest deceleration in the UK economy towards the end of this year- to what extent is that likely to come to pass. We have been expecting that. There are some signs of that. We put those together and determine the likely path for inflation.
Does it make it difficult when your closest trading partner [Europe] is at diametrically opposite point of the cycle?
It’s something we have to take into account but, the ECB is going to conduct monetary policy for the Eurozone, the BoE for the UK. The US and the UK are in different positions than some of the other major advanced economies, most notably the Eurozone. We have a clear mandate, we’ll run monetary policy consistent with that mandate. the only difficulty caused by Europe is that it provides an additional drag on growth, but that doesn’t dictate the monetary policy of the Bank of England.
How will the general election play into some very significant decisions that you, the MPC and the bank generally is going to have to take?
My experience is that you just keep it simple. You do the right thing, you analyse the economy just as you would if it were in the middle of a majority government. You make decisions that are grounded by the remit. you make those decisions- in our case inflation target objective- you make them in a timely fashion. As soon as you start to take into calculation the timing of an election date then you become political and so you just ignore it.

And here’s what he told CNBC.

As some economies emerge from a period of exceptional unconventional stimulus, there will be some volatility. That in and of itself should not influence the path of normalisation of monetary policy. External demand pressures, a benign global inflationary environment, developments in our own labour markets, those will certainly influence the path.
How does, not just Eurozone weakness, but globally, affect the UK economy?
We’ve had a strong recovery over the last 18 months. We’re now in a period of expansion. it’s been driven by domestic demand its reasonably broad based, this is much more than consumption. the business investment is growing more than 10 per cent a year, we’ve had a housing market that’s picked up, so there are other components to it. we have to take into account clearly a more modest global recovery, particularly if thats the case in Europe, and in addition to that domestic focus, we really focus on what's going on in the labour ,market, which will be as important as external developments for the path of monetary policy.
Is the day of interest rate rises still getting closer?
From forecast to forecast the point of normalisation implied by the forecast was moving closer. We’re about to make a new one in November, I can give you an update after that.
Is one of your concerns that there’s some sort of global deflationary impulse that’s going around the globe right now?
There is disinflation, a persistent disinflation in a couple of major economies of the G4, so clearly that’s coming through. The commodity outlook in some commodity spaces is a product of sharp increases in supply, certainly in the oil market, certainly the shale revolution in the US is material. But yes, there is weaker global demand relative to global potential- that is producing a very benign global inflationary environment.

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