Carney: China’s woes won’t derail rate plan
MPC will still look at an increase at turn of the year
A RISE in interest rates is likely to remain on the Bank of England’s agenda at the end of this year despite the meltdown in China.
In his first comments since global stock markets were hit by gyrations in the Shanghai share index, governor Mark Carney said that ‘recent events’ did not yet merit a change in strategy.
He said the decision about when to start returning rates from their current 300year-low of 0.5pc will come into ‘sharper relief around the turn of this year’.
That means the governor is sticking with a timetable he drew up before China’s turmoil, which may be a disappointment for borrowers hoping for a further delay but will be a relief for savers who have endured more than six years of record low rates. Carney and other members of the nine-strong Monetary Policy Committee that sets rates will weigh up the strength of Britain’s economy against weaker global growth and exchange rate movements that could push down inflation.
China recently devalued its currency, sparking a depreciation in a number of other emerging markets. This is likely to lower the price of imports to the UK which in turn could keep inflation below the Bank’s 2pc target.
Imports account for about a third of the elements in the basket used to calculate consumer price inflation, which came in at just 0.1pc in July, edging up from zero a month earlier. Deflation can trigger a downward eco- nomic spiral, as consumers and businesses delay spending and investment in the hope of being able to purchase more cheaply later. The real burden of debt also becomes more onerous as it is not being whittled away by inflation.
Carney said there are ‘profound disinflationary forces at work’ in the global economy, but he claimed there is no sign of a deflation mentality in Britain.
Speaking at a central bankers’ convention in Jackson Hole, Wyoming, he said: ‘In the UK, for example, despite several months of zero or mildly negative inflation rates, there is no evidence of the development of a deflationary mindset among businesses and households. Spending is picking up rather than being delayed.
‘Consumer confidence is at its highest level in over a decade and retail sales have been growing at well above past average rates.
‘Firms’ investment intentions are robust.’
He added that the direct exposure of the UK economy to China is ‘relatively modest’ and that recent developments ‘are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert’.
Separately, a report by industry group EEF claimed just under half of British manufacturers are worried by the possibility of a sharp slowdown in China’s economy and one in ten are reviewing business plans.