Pound Not Convinced by Bank of England's Bearish Growls

(Bloomberg Gadfly) -- U.K. interest rates may need to be increased by a "somewhat greater extent" than is currently implied in financial markets, the Bank of England says. The pound isn't buying it.

In its quarterly inflation report published Thursday, the central bank left its inflation forecasts for the coming quarters largely unchanged. Based on current market expectations for interest rates, consumer price increases are still expected to outpace the bank's 2 percent target through the third quarter of 2020.

The central bank's near-term growth forecast, though, took something of a beating as officials slashed their 2017 business investment prediction to an increase of just 1 percent, down from May's 1.75 percent outlook.

It's the Bank of England's upbeat assessment of the outlook for wages, however, that's the key to skepticism about its willingness to tighten policy. The bank's 3 percent forecast for wage growth next year is above its prediction that inflation will average 2.5 percent.

In the press conference following the publication of the inflation report, Bank of England Governor Mark Carney acknowledged that "there is an element of Brexit uncertainty that is affecting the wage bargaining, some firms, potentially a material number of firms, are less willing to give pay rises given it's not clear what their market access is going to be in the coming years." With unemployment at 4.5 percent, its lowest level since 1975, "we do think that wages will begin to firm," Carney said.

But with wage growth slowing for three consecutive months and declining to 1.8 percent in May, its weakest since November 2014, that looks overly optimistic. Sterling's drop suggests traders expect the Bank of England's bearish growls to be worse than any potential bite.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To contact the author of this story: Mark Gilbert in London at magilbert@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.