Carney sees economy bouncing back, boosting rate-rise expectations
The governor of the Bank of England said the UK economy was bouncing back from a weather-induced slump in activity, reinforcing expectations the BoE would increase interest rates in August.
Mark Carney said recent figures showed the economy developing as the BoE expected – a scenario that might prompt rate-setters to tighten monetary policy to keep inflation in check.
In a speech at a business summit in Newcastle, Carney said: "Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate. A number of indicators of household spending and sentiment have bounced back strongly from what increasingly appears to have been erratic weakness in Q1."
Carney, who chairs the BoE’s monetary policy committee (MPC), said the labour market was strong and slack in the economy had been largely used up, while pay and cost growth had strengthened broadly as expected. Headline inflation is expected to rise because of higher energy prices.
"Overall, recent domestic data suggest the economy is evolving largely in line with the May inflation report projections, which see demand growing at rates slightly above those of supply and domestic cost pressures building. The MPC will continue to monitor incoming data and review prospects for growth and inflation in the UK in order to set monetary policy consistent with returning inflation sustainably to target."
Carney said the MPC has stressed that if the economy developed in line with the projections contained in the latest Inflation Report, monetary policy would need to tighten over the next few years. His comments sent the pound up 0.14% against the dollar to $1.3248 and 0.16% to €1.1335.
The BoE had prepared markets for a rate rise in May, but the MPC then held off after extremely weak data for the first quarter raised concerns the economy was slowing rapidly.
However, Carney did say he thought the gloomy data would likely turn out to be a blip caused by extreme winter weather in March and that the MPC would wait to see if the figures improved.
Recent figures have shown business activity strengthening for services and manufacturing and some improvement for the construction industry. Carney's comments suggest the more positive data will be enough for the BoE to increase borrowing costs by a quarter point from their current rate of 0.5%.