Bank of England’s Carney says his message on rates isn’t misunderstood

LONDON (Reuters) – Bank of England Governor Mark Carney denied on Tuesday that the central bank had confused investors and households by not raising interest rates earlier this month.

In February, the BoE said rates were likely to go up sooner and somewhat faster than investors had been expecting, prompting financial markets to price in a rate hike at the central bank’s May meeting as a near-certainty at one point.

Carney, speaking to lawmakers on Tuesday, said a slowdown in the economy in the first three months of 2018 – when heavy snow and icy conditions hit Britain – would probably prove temporary. This echoed his comments from earlier this month when the BoE decided to keep rates at 0.5 percent.

“Our view is not that circumstances changed in the first quarter. It’s more likely to have been temporary and idiosyncratic factors that slowed the economy,” he said.

While investors scaled back their bets on a rate rise, Carney said surveys showed households and businesses largely expected a rate hike this year and more increases “at a very gentle pace relative to history” after that.

Carney has in the past given several signals about when rates are likely to rise, only to be wrong-footed by twists and turns in the economy.

Carney said his main message – that rates are likely to rise only slowly – has proven correct.

Earlier on Tuesday, one of the nine members of the BoE’s Monetary Policy Committee, Gertjan Vlieghe, said he expected slightly more interest rate increases over the next three years than the market assumption of just under three 25 basis-point hikes during that period used by the BoE earlier this month.

“Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25bp to 50bp per year over the forecast period,” Vlieghe said in written answers to questions from lawmakers.

“That is slightly higher than the conditioning assumption for interest rates in the May 2018 Inflation Report. That is a forecast, not a promise, and will depend on how the economy evolves,” he said.

Sterling – which on Monday hit its lowest level against the U.S. dollar in nearly five months – rose against the euro and the dollar after Vlieghe’s comments before easing slightly.