March 5, 2019 / 5:01 PM / 6 months ago

BoE's inflation view suggests market underestimated rate hikes: Carney

FILE PHOTO: Bank of England Governor Mark Carney speaks at a press conference at the Bank of England in London, Britain February 25, 2019. Kirsty O'Connor/Pool via REUTERS

LONDON (Reuters) - Bank of England Governor Mark Carney said the fact that the central bank’s most recent economic forecasts showed inflation above the BoE’s target over its three-year forecast period meant investors had not priced in enough monetary tightening.

“In other words, the path of interest rates is not firm enough, it’s not quite high enough for us to be fulfilling our mandate, which sends a broad signal in terms of the stance of policy,” Carney told a committee in the upper house of Britain’s parliament on Tuesday.

The BoE said in February it expected British inflation in two and three years’ time to stand at about 2.1 percent, a touch above its 2 percent target, even as investors scaled back their bets on how much interest rates were likely to rise.

The BoE’s forecasts were based on the assumption that Britain reaches a deal with the European Union to smooth its exit from the bloc.

Carney also said on Tuesday that a degree of slack was opening up in Britain’s slow-growing economy, something that was consistent with less interest rate tightening, but at the same time inflation-adjusted wages were growing.

In the face of Brexit uncertainty, companies had shown a preference for hiring staff over making investments, he said.

Carney also said he saw a future for inflation-protected British government bonds linked to the consumer price index rather than the outdated retail price index (RPI), contrasting with the views of the head of Britain’s debt agency who last year warned this could fragment the market.

Currently around a third of British debt is RPI-linked, but the Office for National Statistics no longer deems RPI fit for purpose because of its method of calculation.

“If a decision were taken that there would be a move to CPI indexing, and that RPI would become a legacy and then a distant memory... the demand will absolutely be there and that market (for CPI-linked bonds) would develop, in my judgment,” Carney said.

Reporting by Andy Bruce; Writing by William Schomberg; editing by John Stonestreet

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