Mark Carney today defended central bank policies in front of MPs, saying that politicians blaming inequality on the actions of central bankers were engaged in a “massive blame-deflection exercise”, while also warning firms not to leave the City because of Brexit.
The Bank of England governor held firm on the bank’s forecast of inflation above two per cent in 2017 and the neutral stance on forward guidance at a Treasury Select Committee hearing.
Early in testimony that will be seen as an implicit criticism of Prime Minister Theresa May after her comments on the central bank, Carney said, “It’s very important to distinguish between the stance of monetary policy and the reasons why global interest rates are low, the reasons why inequality has increased across major economies. The last two are caused by much more fundamental factors. Excessive focus on monetary policy in many respects is a massive blame-deflection exercise.”
He also urged financial services firms to hold off from triggering “contingency plans” to leave the City when the UK begins to leave the European Union.
“I would stress to those firms that it is very early days so planning makes sense, action in most cases, I would say in general, is precipitous,” he said.
Inflation is coming
Carney confirmed that the BoE’s Monetary Policy Committee will maintain a “neutral bias” on forward guidance for the time being amid uncertainty over the government’s negotiating position on leaving the European Union.
He said, “The unanimous view of members of the MPC is that the stance on monetary policy is appropriate.”
The committee’s chairman Andrew Tyrie MP described the BoE’s statements as “Delphic utterances”, saying that “the guidance is that there isn’t any”.
However, the governor did stick with the BoE’s predictions of higher inflation in the medium term, despite the surprise fall in inflation for October. He blamed the decrease in inflation in October on short-term, seasonal effects.
“Inflation is going up. The pass-through from a 20 per cent fall in the trade-weighted level of sterling is going to come. It’s going to build towards the end of this year into 2017 and in our expectation be above two per cent certainly by the middle of 2017 and stay there for a while,” said Carney.
Carney told the committee that the fall in the value of sterling since the vote reflected a market view that Brexit would affect the openness of Britain’s economy.
“It has been consistent with an expectation of a reduced degree of openness and a slower pace of growth than has been the reaction of consumers,” said Carney.
Resolution of divergence
The governor said that the difference between consumer spending, which has stayed relatively solid since the Brexit vote, and financial markets would not last. Wages have grown and credit has not so far tightened significantly, but financial markets have adjusted noticeably.
“At some point there will a resolution of that difference, either through revised expectations of financial markets or adjustment in consumer behaviour and therefore the pace of growth in this economy,” he said.
Carney also said that any major changes in monetary policy would probably not be clear until next year. “By the spring we will be better informed of how businesses have adjusted,” he said. “There is a high bar in the medium term about what kind of adjustment we will get.”
The governor would not be drawn on predicting the government's negotiation strategy. “We are not a forecasting engine of Parliament. We are looking at longer-term structural issues,” he said.