Carney's Mansion House speech: 'now is not yet the time' for rate rise

Bank of England Governor Mark Carney said interest rates would remain unmoved from their current low levels for a while longer given the "mixed signals" from the UK economy, an argument that send the pound lower on Tuesday.

Delivering his delayed Mansion House speech at a City of London breakfast, after the event was pushed back from last week due to the Grenfell Tower disaster, Carney said current economic conditions were not yet right to raise borrowing costs, with so much uncertainty around Brexit negotiations still swirling and current "anaemic" wage growth.

While acknowledging that the Bank's Monetary Policy Committee were split five-to-three over a potential rate hike at last week's monthly policy meeting, the Canadian said he was not ready to join the three hawks squawking for a rise.

He said the economy outperforming previous expectations and record low unemployment showed the low interest rate environment and quantitative easing programme was working.

But as spare capacity in the economy erodes, he said the MPC's tolerance for above-target inflation was falling.

"Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace," he said.

"From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment.

"In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations."

"During the negotiating period the economy will be importantly influenced by the expectations of households, firms and financial markets about the nature of both the transition and the longer term economic relationships with the EU and other countries.

"Markets have already anticipated some of the adjustment. Depending on whether and when any transition arrangement can be agreed, firms on either side of the channel may soon need to activate contingency plans.

"Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.

"Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting as best it can the necessary adjustments in the economy."

The pound fell 0.4% against the dollar to touch 1.267 with investors seeing the tone as indicative of the Bank’s desire to leave rates on hold for as long as it can.

The FTSE 100 jumped at the same time, rallying around 30 points as heavyweight dollar earners like HSBC and Shell turned higher.

"Quite why anyone was surprised is unclear but the market reacted," said analyst Neil Wilson at ETX Capital. "Carney’s warning that ‘now is not the time’ to tighten should hardly be a surprise, given his record of favouring looser monetary policy, but it does reiterate the MPC’s preference for looking through the current high levels of inflation for the time being."

After the split moved from its previous 7-1 to 5-3, if inflation accelerates over the summer the MPC could still be minded to nudge the base rate up 25 basis points, Wilson suggested.

"There are plenty who think that the Bank’s decision to cut last summer following the Brexit vote was folly and rising inflation offers a chance to correct that ‘error’. However the departure of arch-hawk Kristin Forbes leaves those calling for tightening in a greater minority than before."

Wilson said Brexit negotiations will see cable remain pretty range-bound until there is a clearer steer on the trading arrangement between Britain and the EU.