Daily Management Review

Ahead After 2016 Strength, Brexit Consumer Slowdown Seen by Carney


01/17/2017




Ahead After 2016 Strength, Brexit Consumer Slowdown Seen by Carney
Fresh headwinds in 2017 that are likely to curb growth, according to Mark Carney, are likely to be faced by consumers who were the backbone of U.K. economic resilience after the Brexit vote.
 
The governor of the Bank of England said in London on Monday that as the impact of the weakening pound feeds through to prices,, the Bank of England policy makers will be monitoring developments closely. Noting the fastest acceleration since 2014 is expected to be exhibited by the figures for the month of December, announcement of which are likely to be made this week itself.
 
The BOE still sees a loss of momentum because of Brexit even though the bank may upgrade its forecast again in February as it had upgraded its 2017 forecast late last year. For this purpose, Prime Minister Theresa May could provide some details of her strategy on Britain’s new deal with the European Union in a speech on Tuesday and that would, in a significant manner, decide the outlook for the future months.
 
“Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally,” Carney said. However, since it eventually overtakes earnings, leaving demand more sensitive to household employment and income changes., he warned that consumption-led growth “tends to be both slower and less durable.”
 
Carey said that there are limits to the extent to which inflation above the BOE’s 2 percent target can be tolerated and that interest rates can go up as well as down, while reiterating the Monetary Policy Committee’s neutral stance. He added that as the U.K. negotiates its divorce from the EU, the key will be the response of households to faster inflation.
 
“How household spending evolves, and the inter-temporal trade-off that households strike, will be important considerations over the next year,” Carney said.
 
To regain control of Britain’s borders and laws, May could signal her willingness to quit the EU’s single market for goods and services in her speech. In response to reports of her plans, the pound had slipped below $1.20 for the first time in more than three months and Carney spoke after the fall of the pound.
 
Saying the U.K. currency “can go up and down”, Carney dodged a question on whether he saw the pound depreciating further.
 
In the speech Carney said there was not a simple rule that could guide their decisions even as his speech was largely focused on the theory behind policy makers’ trade-off between supporting growth and keeping inflation stable.
 
Carney said that due to sterling’s slide boosting import prices, supply shocks like the Brexit decision imply lower growth and higher inflation. Bringing inflation to target too quickly risks a greater loss of output and jobs because monetary policy primarily affects demand. He explained that was why the BOE was right to loosen policy in August.
  
The U.K. has faced this trade-off before when a series of supply shocks affected it since the financial crisis. He said that the same tension between output and inflation, has not been faced by the U.S. and the euro area in contrast.
 
(Source:www.bloomberg.com)






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