The Bank of England has begun setting the stage for how it will steer the British economy once it officially leaves the European Union (E.U.).
Bank of England Governor Mark Carney said at The Monetary Policy Committee Wednesday that there may be a need for faster rate increases in the coming years after the break from the E.U., dubbed "Brexit," is completed.
Governor Carney said the British economy may start running hot earlier than previously anticipated as wage growth improves and domestic costs build. It sees the inflation rate staying above its 2% target for the next two years. The central bank left interest rates unchanged after its Thursday meeting.
The slightly hawkish outlook is based on an assumption that Brexit goes smoothly. Carney acknowledged Thursday that may not be the case. He said the exit deal with the E.U. remains the biggest factor when it comes to the economy and monetary policy going forward.
"The monetary policy response to Brexit, whatever form takes, will not be automatic and could be in either direction," the bank said in its quarterly Inflation Report. While the exact impact of Brexit "cannot be determined in advance, under all circumstances, the (central bank) will respond to any material change in the outlook."
In a sign of how Brexit is affecting the economy, the Bank of England slashed its forecast for business investment and sees stagnation this year. It also lowered its 2019 economic growth outlook slightly to 1.7%. On the global economy, it said growth has become more uneven, and downside risks have increased.
The predictions, including the outlook for faster inflation, are based on market measures indicating that the Bank of England will deliver about three more quarter-point interest rate hikes by late 2021, more than were foreseen a few months ago.
The central bank assumes a relatively stable path for the pound over the next three years, a crucial determinant for inflation. At the same time, it said the currency will probably rise if there's a Brexit deal that keeps a close relationship with the E.U., or drop if the United Kingdom crashes out without new trade arrangements in place.
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