November 1, 2018 / 12:36 PM / 16 days ago

CORRECTED-UPDATE 2-Bank of England hints at faster rates hikes, but post-Brexit options open

 (Corrects reference in paragraph 20 to implied interest rate
path in August Inflation Report)
    * BoE MPC vote 9-0 to hold rates at 0.75 pct
    * Rates could move either way after a "disruptive" Brexit
    * Economy seen running above capacity sooner than in August
    * BoE assumptions see almost 3 rate rises over next 3 years

    By David Milliken and Alistair Smout
    LONDON, Nov 1 (Reuters) - The Bank of England hinted at
slightly faster future rises in interest rates if Brexit goes
smoothly, but warned all bets were off if next March brought a
"disruptive" departure from the EU.
    The BoE's nine rate-setters voted unanimously to hold rates
at 0.75 percent on Thursday, as expected by economists in a
Reuters poll, after raising them in August for only the second
time since before the financial crisis.
    Bank of England Governor Mark Carney said a disruptive
no-deal Brexit was not the central bank's main assumption but if
there was a shock to the economy, it was not possible to say if
rates would need to rise or fall in response.
    Brexit is dominating the outlook for the world's
fifth-largest economy, which has seen growth slow since the
referendum decision in June 2016 to leave the European Union.
Most economists do not expect rates to rise again until
mid-2019.
    "Since the nature of EU withdrawal is not known at present,
and its impact on the balance of demand, supply and the exchange
rate cannot be determined in advance, the monetary policy
response will not be automatic and could be in either
direction," Carney told a news conference.
    The BoE cut interest rates and ramped up its bond-buying
programme after the shock referendum vote, but Carney cautioned
against assuming it would do the same in the event of a no-deal
Brexit.
    One option, he said, would be to extend the horizon for
returning inflation to the BoE's target, a measure which would
suggest slower interest rates hikes.  
    A disruptive Brexit would probably cause sterling to fall
and push up inflation. Combined with a hit to supply chains and
possible trade tariffs, that would argue for raising rates.
    The BoE said policymakers would need to balance the hit to
growth from lost trade, uncertainty and tighter financial
conditions. That would normally make a case for lower rates.
    Sterling rose modestly against the dollar        after the
BoE policy announcement to hit a day's high. It later fell back
to show almost no change from before the statement.
    "November's statement makes it pretty clear the Bank of
England would like to be hiking rates further," James Smith, an
economist at bank ING, said. 
    "But given that it may be quite some time before we know for
sure that a no-deal Brexit has been avoided, we suspect
policymakers will struggle to hike rates before May 2019 at the
earliest."
    
    CONSUMERS RESILIENT, BUSINESSES NERVOUS
    The BoE said consumer spending performed better than it had
expected but businesses were holding back on investment until
there was clarity about Brexit.
    Prime Minister Theresa May has yet to secure a transition
deal to ease Britain's exit from the EU. 
    There has been progress towards an agreement giving London's
dominant financial centre basic access to EU markets, two
British officials said on Thursday.             
    Assuming Brexit goes smoothly, the economy was likely to
continue to grow by around 1.75 percent a year, the BoE said.
    This is some way below the rate of above 2 percent that was
typical before Britain voted to leave the EU, but the BoE said
the economy was at full capacity and inflation would take three
years to drop from 2.4 percent now to its 2 percent target.
    The economy was expected to start running above capacity
late next year, sooner than the BoE had forecast in August,
creating inflation pressure.
    The BoE's inflation worry comes despite it pencilling in
almost three quarter-point interest rate rises over the next
three years, compared with just over one in forecasts that
accompanied August's rate rise.
    The assumptions are based on market pricing, but they give
some indication of how fast the BoE thinks borrowing costs will
need to rise.
    Carney, asked by a reporter whether financial markets had
priced in enough rate hikes, pointed to the BoE's forecast that
inflation would be a bit above its target in two years' time.
    That suggested he thought investors were being a bit too
cautious about the pace of rate hikes.
    Despite the lack of slack in the economy and recent
faster-than-expected rises in wages, the BoE's kept its
medium-term pay forecasts unchanged, seeing growth of 3.25
percent by the end of next year and 3.5 percent in late 2020.

 (Editing by William Schomberg and John Stonestreet)
  
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