The Bank of England expects a faster rate hike, but post-Brexit options are open

LONDON (Reuters) – The Bank of England has hinted that interest rates would rise a little faster if the Brexit went smoothly, but warned that all bets were angry if, in March next, the EU was moving away in a "disturbing" way.

The BoE's nine policymakers voted unanimously to keep rates at 0.75% on Thursday, as economists expected in a Reuters poll, after raising them in August for the second time since the financial crisis.

The Governor of the Bank of England, Mark Carney, said that a Brexit without disruptive agreement was not the main assumption of the central bank, but in case of shock on the economy it would not be possible to say whether rates should go up or down as a result.

Brexit dominates the outlook for the world's fifth largest economy, whose growth has slowed since the referendum decision to leave the European Union in June 2016. Most economists do not expect a further rate hike before mid-2019.

"The nature of the withdrawal of the EU being not known at the present time and its impact on the balance of demand, the supply and the exchange rate can not to be determined in advance, the reaction of monetary policy will not be automatic and could go both ways, "said Carney. said a press conference.

The BoE lowered interest rates and stepped up its bond buying program after the referendum vote, but Carney cautioned that the same would be true in the event of a Brexit without a transaction.

One possible solution would be to extend the time horizon for the return of inflation to the BoE target, which would suggest a slower rise in interest rates.

A disruptive Brexit would probably drop the pound sterling and increase inflation. Combined with a negative impact on supply chains and possible commercial rates, this would argue for an increase in rates.

The BoE said policymakers should strike the right balance between loss of trade, uncertainty and tightening financial conditions. This would normally justify lower rates.

The pound sterling rose slightly against the GBP = dollar after the announcement of the BoE's policy to reach the top of a day. Subsequently, it has hardly changed since the beginning of the declaration.

"The November statement makes it clear that the Bank of England would like to further raise rates," said James Smith, an economist at ING Bank.

"But since it may take a while before we know for sure that a Brexit without agreement has been avoided, we think policymakers will have a hard time raising rates before the month of May 2019 at the earliest. "

RESILIENT CONSUMERS, NERVOUS ENTERPRISES

The BoE said consumer spending had performed better than expected, but companies were holding back investment until Brexit became clear.

Prime Minister Theresa May has not yet signed a transitional agreement to facilitate Britain's withdrawal from the EU.

Progress has been made towards an agreement giving London's dominant financial center basic access to EU markets, two British officials said Thursday.

Assuming the Brexit goes well, the economy is expected to continue growing at about 1.75% a year, the BoE said.

This rate is well below the rate of more than 2% that was typical before Britain voted in favor of leaving the EU, but the BoE said the economy was at full capacity and that inflation would take three years to fall from 2.4% to 2% now.

The economy is expected to start outstripping production capacity late next year, earlier than expected by the BoE in August, creating inflationary pressure.

The BoE's inflation concerns come at a time when interest rates have risen nearly three points over the next three years, compared to just over one of the forecasts that accompanied the August rate hike. .

The assumptions are based on market prices, but they give some idea of ​​how quickly the BoE thinks that borrowing costs will need to rise.

Carney, interviewed by a reporter about whether the financial markets were planning sufficient rate hikes, said the BoE expected inflation to be slightly above target in two years.

This gave him the impression that investors were a bit too cautious about the pace of rate hikes.

Despite the lack of a slowdown in the economy and faster than expected wage increases, the BoE has maintained its medium-term earnings expectations, growing by 3.25% at the end of next year and 3.5% at the end of 2020.

(This story corrects the reference in paragraph 20 to the implicit trajectory of interest rates in the August Inflation Report)