Carney’s Rate Hike Outlook Doubted for Now as BOE Awaits Brexit

© Bloomberg. Mark Carney, governor of the Bank of England (BOE), gestures while speaking during the bank’s quarterly inflation report news conference at the central bank in the City of London, U.K., on Thursday, May 2, 2019. The BOE signaled that the market is slightly underpricing the outlook for interest-rate increases over the next three years as long as Brexit goes smoothly. Photographer: Chris Ratcliffe/Bloomberg

(Bloomberg) — Mark Carney is struggling to convince investors they’re underestimating how many U.K. interest-rate increases lie ahead.

The pound failed to extend a four-day rally and gilts were steady after the Bank of England governor said that policy makers were ready to raise borrowing costs by more than the market curve implied — assuming the U.K. makes an orderly exit from the European Union. Money markets were unmoved, with the chance of a rate hike by the end of year holding steady around 35 percent.

The dull reaction may reflect skepticism that the bank’s Brexit assumptions will bear out. While fears of a no-deal departure have faded since the two sides agreed to an extension of the exit deadline last month, investors doubt the impasse can be resolved any time soon after more than two years of chaos in British politics.

“Guess the market doesn’t believe Carney,” said Kristoffer Kjaer Lomholt, a Copenhagen-based strategist at Danske Bank A/S. “We don’t expect any hikes either. At least not on this side of Brexit.”

The pound fell 0.2 percent to $1.3024 and was 0.1 percent lower against the euro at 85.89 pence per euro after Carney’s press conference. The yield on the U.K.’s 10-year government bonds rose two basis points to 1.17 percent.

Carney acknowledged that Brexit was creating a lot of uncertainty, and the bank reiterated that the issue was the biggest factor determining the outlook for the U.K.

Still, if there is a benign Brexit resolution, “with some form of relatively smooth transition to it, it will require interest rate increases over that period and it will require more and more frequent interest rate increases than the market currently expects,” he said.

Investors are predicting only one more quarter-point hike between now and 2021. That path is “unequal” to achieving the BOE’s inflation remit, the governor said. Policy makers raised forecasts for growth while keeping their prediction for inflation in two years at 2.1 percent, higher than their target.

The BOE also forecast excess demand emerging in 2021 which would have an upward impact on inflation beyond the bank’s forecast period.

Still, the bank said it saw little cost to waiting before taking action.

The BOE “currently prefers to adopt a ‘wait and see approach’ on interest rates until the Brexit situation becomes clearer and it can see how the economy is reacting,” said Howard Archer, chief economic adviser to EY Item Club. “The odds certainly favor the BOE keeping interest rates at 0.75 percent through 2019. However, it’s not a nailed-on certainty.”

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