Mark Carney has used a speech in Washington to warn that Brexit is likely to drive inflation higher, and again flag that the Bank of England could raise interest rates within months.
The central bank governor made the comments as part of a lecture at the International Monetary Fund headquarters in Washington, DC, less than a week after the Bank’s Monetary Policy Committee (MPC) voted 7-2 to keep interest rates on hold.
But investors are now widely expecting an interest rate hike in November, following strong signals from the Bank which were reiterated in Mr Carney’s speech on Monday.
“As the committee stated last week, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target,” the governor said.
However, Mr Carney said that “any prospective increases” in the Bank’s benchmark interest rate would be made at “a gradual pace and to a limited extent” and would need to continue providing “substantial support to the economy”.
The governor also warned that Brexit could temporarily push up inflation, which is currently at 2.9% and far beyond the Bank’s 2% target.
He flagged the effects of any potential increases in tariffs on UK imports, or increases in the cost of imports due to “broader access restrictions”.
“Abrupt decreases in migration” could also spark shortages in some British industries that have become reliant on migrant labour and ultimately “contribute more materially to inflationary pressures”, Mr Carney added.
That is likely to compound the effects of any further devaluation of sterling, which has already fallen against major currencies including the US dollar and euro in the wake of the Brexit vote.
But the central bank boss also cautioned that the Bank of England was limited in what it could do to mitigate those effects.
“It is critical to recognise that Brexit represents a real shock about which monetary policy can do little.
“Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises.
“And it can support UK households and businesses as they adjust to such profound change.”