May 22, 2018 / 9:42 AM / 3 months ago

UK economy will bounce back from weak start to 2018: BoE's Carney

LONDON (Reuters) - Bank of England Governor Mark Carney said on Tuesday he expected Britain’s economy would bounce back from a weak start to the year when it was hit by heavy snowstorms, keeping the prospect of higher interest rates on the table.

Speaking to lawmakers, Carney also denied that the central bank had confused investors and households by not raising interest rates earlier this month, in contrast to what had been widely expected until shortly before the BoE’s meeting in May.

“Our view is not that circumstances changed in the first quarter. It’s more likely to have been temporary and idiosyncratic factors that slowed the economy,” he said, echoing comments he made earlier this month.

In February, the BoE said rates were likely to go up sooner and somewhat faster than investors had been expecting, prompting financial markets to price in a rate hike at the central bank’s May meeting as a near-certainty at one point.

Instead, the BoE’s nine rate-setters voted 7-2 to keep rates at 0.5 percent, their emergency level for most of the decade since the global financial crisis, as they waited to be sure that the first-quarter weakness was a weather-related blip.

Carney said on Tuesday that surveys showed households and firms largely expected a rate hike in 2018 and more increases “at a very gentle pace relative to history” after that.

Carney has given several signals over the past few years about when rates were likely to rise, only to be wrong-footed by twists and turns in the economy.

Britain’s economy overall was 1.5-2.0 percent smaller than it would have been if it had grown as the BoE forecast before June 2016’s EU referendum — equivalent to a loss of about 900 pounds ($1,212) for a household on an average income, he said.

Carney added that his main message — that rates are likely to rise only slowly — has proven correct.

Mark Carney, Governor of the Bank of England, speaks at Parliament's Treasury Committe in London, Britain, May 22, 2018. Parliament TV handout via REUTERS

Earlier on Tuesday, Monetary Policy Committee member Gertjan Vlieghe said he expected slightly more interest rate increases over the next three years than the market assumption of just under three 25 basis-point hikes.

“Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25 bp to 50 bp per year over the forecast period,” Vlieghe said in written answers to questions from lawmakers.

“That is a forecast, not a promise, and will depend on how the economy evolves.”

Sterling, which on Monday hit its lowest level against the U.S. dollar in nearly five months, rose against the euro and the dollar after Vlieghe’s comments. [GBP/]

Vlieghe also backed the idea of the BoE following the example of the U.S. Federal Reserve and publishing forecasts from its policymakers for interest rates.

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“The advantages outweigh the risks, in my judgement. I think such a change would represent a further, modest, evolutionary improvement in communications,” Vlieghe told the lawmakers.

But Carney said most MPC members were opposed to the idea. “I think the risks of it being interpreted as a promise, as a commitment are real,” he said.

Additional reporting by UK bureau; Writing by William Schomberg; Editing by Catherine Evans

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