LONDON (Reuters) - Now is not the time to raise interest rates, Bank of England Governor Mark Carney said on Tuesday, warning that already weak wage growth risked a further loss of momentum as Britain prepares to leave the European Union.
In a speech to London’s banking community a day after Brexit talks started, Carney dashed any prospect that he might be close to joining the three BoE policymakers who last week unexpectedly voted to raise rates from their record low of 0.25 percent.
Sterling plunged by three quarters of a cent against the dollar GBP= after Carney's remarks, and 10-year gilt yields GB10YT=RR dipped below 1 percent.
The BoE is juggling the tricky combination of rising prices caused in large part by the fall in the value of the pound since the June 2016 vote to leave the bloc, and slowing wage growth as the economy loses much of last year’s impetus.
The uncertain outcome of the Brexit talks is also expected to weigh on consumers and companies.
Finance minister Philip Hammond told the same Mansion House audience that it was important to avoid a “cliff edge” when Britain quits the EU in 2019 and to have a transitional deal on trade before a full agreement is reached.
Carney said that if there was insufficient progress on this, businesses in Britain and other EU countries might soon start to activate their own Brexit 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,” he said.
“Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU.”
Before becoming Britain’s foreign minister, Boris Johnson had dismissed the idea of trade-offs in the EU divorce process by saying his “policy on cake is pro having it and pro eating it”.
Sterling dropped more than 10 percent after last summer’s referendum vote, which Carney said reflected financial markets’ dim view of Brexit’s likely effect on the economy.
Sterling’s weakness been a factor in consumer price inflation reaching its highest in nearly four years, contributing to a slowdown in consumer spending and lackluster first-quarter growth.
Carney’s concerns about the economic impact of Brexit added to “mixed signals” on consumer spending and business investment, as well as wage growth that remained “anemic” even with unemployment at its lowest for more than 40 years.
A rate rise was not yet appropriate, Carney said.
“Now is not yet the time to begin that adjustment,” he said. “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 reality of Brexit negotiations.”
Carney underlined the importance of free trade - especially in financial services - and said the EU it would face greater costs if it tried to remove activities such as clearing euro-denominated derivatives from London.
He also said that whether Britain’s large current account deficit was sustainable remained an open question, “one whose answer depends crucially on the outcome of the Brexit negotiations”.
Editing by John Stonestreet