China’s problems are unlikely to prevent a rate rise, says Carney
The Chinese slowdown and rattled investor confidence this week prompted expectations that rate increases might be taken off the agenda in the short term in both the US and UK, where the cost of borrowing has remained at 0.5 per cent for more than six years.
But speaking at an annual gathering of central bank bosses in Jackson Hole, Wyoming, Mr Carney said that the current concerns over China were outweighed by the “ongoing domestic strength” of the UK market, credible policy and an “increasingly robust financial system”.
“The direct exposure of the UK economy to China is relatively modest,” he told delegates.
“Developments in China are unlikely to change the process of rate increases.”
In July, the Governor gave strong hints that interest rates would rise by early 2016, claiming that they would probably go up slowly and reach a level “about half as high as historical averages” of 4.5 per cent.
He warned then that shocks to the economy, and shifts in the exchange rate, could have an impact on the pace and size of any increases.
The move would provide long-awaited relief to savers who have seen their returns shrink in the wake of the financial crisis.
However, it would also increase pressure on borrowers, who would have to pay more for their mortgages and credit card bills, and could hit the housing market.
Doubts over Mr Carney’s plans were raised when some £74bn was wiped off the value of the UK’s FTSE 100 companies in the two days following this week’s Black Monday crash.
However, in the second half of the week London’s top-flight share index bounced back and saw its biggest rise in nearly four years.
Mr Carney told the Economic Policy Symposium hosted by the Federal Reserve Bank of Kansas City: “Consumer confidence is at its highest level in over a decade and retail sales have been growing at well above past average rates.
“Firms’ investment intentions are robust. And inflation expectations remain consistent with our two per cent target.”
Mr Carney said on Saturday that a Chinese slowdown could add to pressure pushing down on prices in Britain, and risk aversion in global markets could make financial conditions in the country tighter, which would also weigh on inflation.
He added: “These are possibilities, not certainties. Their evolution needs to be monitored, not taken for granted,” he said. He also said the Bank could “look through” the temporary disinflationary impact on inflation from lower demand in China for commodities but would watch for any longer-lasting impact on Britain from a slowing of the world’s second largest economy.
Mr Carney stressed that his comment on the timing of a decision by the Bank on rates did not prejudge any particular decision.
“But it does indicate that recent events do not yet, to my mind, merit changing the MPC’s (Monetary Policy Committee’s) strategy for returning inflation to target,” he said.
The Canadian’s message came after Stanley Fischer, a high-ranking official from the United States’ Federal Reserve, kept the option of an interest rate rise in September on the table.