Carney Won’t Change Rates Again at the BOE, Niesr Says

(Bloomberg) -- Mark Carney probably won't move interest rates again while at the Bank of England, according to the National Institute of Economic and Social Research.

Just two days after the governor said he'd stay in the role until June 2019, a year longer than initially planned, the institute forecast that the BOE will keep its benchmark on hold at 0.25 percent through the U.K.'s withdrawal negotiations with the European Union. The next move will probably be a hike around the third quarter of 2019, it said.

‘‘It's only at the end of 2020 that the rate of inflation returns back to target in our forecast, so we do expect the Monetary Policy Committee to keep bank rate at about a quarter of a percent right through until 2019,” said Simon Kirby, principal research fellow at Niesr.

The BOE announces its next decision on Thursday, and economists surveyed by Bloomberg expect no change in policy. The lack of action reflects the performance of Britain's economy since the referendum in June. Growth has been better than expected and the pound's plunge has started to feed into inflation.

In a report published on Wednesday, Niesr raised its 2016 growth forecast to 2 percent from 1.7 percent and its 2017 projection to 1.4 percent from 1 percent. Because of the pound's decline, it sees inflation accelerating next year, peaking at 4 percent in the second half, though the BOE will look through this near-term spike. The central bank will probably lift its own growth and inflation estimates on Thursday, which will be published alongside its interest-rate announcement.

The better-than-expected economic performance since the vote has presented difficulties for Carney, with some critics saying the bank acted too forcefully after the referendum. He's been an unpopular figure among pro-Brexit campaigners, who argue he undermined the three-century-old BOE by showing political bias.

That rhetoric has been worrying, Niesr director Jagjit Chadha told reporters in London on Tuesday. “I regret the debate that we've been having about operational central bank independence,” he said, noting that inflation expectations could become unhinged if the central bank's credibility is questioned. “Monetary policy making should be separate to the question of the political business cycle, and I'm concerned.”

Slowing Growth

Separately, the Confederation of British Industry on Wednesday forecast that growth will slow to 1.3 percent in 2017, a downgrade from its previous prediction of 2 percent in May, before the Brexit vote. It said heightened uncertainty will lower business investment, while inflation may damp consumer spending.

Niesr's report also predicts a shift in the driver of Britain's economy from households to trade. The contribution from consumer expenditure is set to be “compressed dramatically” over the course of 2017 and 2018, Kirby said, “as uncertainty and the impact of the sharp rise in inflation on purchasing power of households comes into play.”

Growth will instead be supported by trade, as imports decrease due to the weakness of the domestic economy and exports get a boost from the lower exchange rate. Nevertheless, weak external demand remains a risk to the outlook, Kirby said.

The CBI also said net trade will contribute more in the coming years, though an increase in import costs will probably “take the edge off the competitiveness boost.” That was reflected in a manufacturing survey Tuesday, which showed that factory input prices are surging.

In another paper, Niesr research fellow Monique Ebell said that leaving the EU single market would lead to a 60 percent reduction in trade of services, the biggest part of the U.K. economy, over the long run. She warned that there's “no evidence that signing less comprehensive free trade deals will be able to replace any of this.” The loss of the single market trade would imply a 24 percent reduction in the U.K.'s total services trade.

--With assistance from Mark Evans To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net. To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe, Andrew Atkinson