“Now is not yet the time” to tighten monetary policy, governor of the Bank of England Mark Carney said in his delayed Mansion House speech on Tuesday morning, in comments that dented sterling to under $1.27.
Mr Carney listed mixed signals on consumer spending and business investment, subdued domestic inflationary pressures and anaemic wage growth as reasons to hold off from reducing the extraordinary stimulus measures the Bank introduced last August.
The speech is the governor’s first public appearance since three members of the Bank’s currently eight-person monetary policy committee voted to raise interest rates last week. This was the closest the central bank has come to tightening monetary policy since 2011.
Before changing policy the governor said that he, personally, would like to see how weaker household spending is offset by better trade or a rebound in investment; whether wages start to increase and “how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
Without a transition arrangement, some companies on both sides of the English channel may soon need to activate contingency plans, he said. “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.”
Mr Carney’s speech, which was delayed because of the Grenfell tower fire, mainly focused on “global imbalances” which have become a politically controversial issue in the Donald Trump White House.
He used the speech to defend London’s role as a hub for global derivatives trading. Saying that fragmenting such markets would reduce the benefits of central clearing, which had helped to make finance more resilient since the 2008 financial crisis.
The European Commission published plans earlier this month that would force UK-based clearing houses, such as the London Stock Exchange Group’s LCH, to stick to EU regulations and accept requirements set by the European Central Bank.
“Fragmentation is in no one’s economic interest. Nor is it necessary for financial stability,” he said. He said he recognised European concerns, having faced them himself at the Bank of Canada, but they were addressed through “common standards and cooperative oversight.”
The governor defended globalisation in his speech while acknowledging concerns about imbalances. “Protectionist sentiments are once again rising across the advanced world. Excessive trade and current account imbalances are now politically as well as economically unsustainable,” Mr Carney said.
He rejected the framing of these imbalances as ‘morality tales’ that contrast the “virtues of Swabian housewives” with the “vices of Anglo Saxon rakes”. He pointed out that the US and UK trade deficits are partly due to their having younger populations than Japan and Germany.
However he also said that the UK and US were running excess deficit “relative to fundamentals” and that this could be an indicator of financial instability or unfair competitive advantage — “either through managed trade or managed exchange rates”.