Bank of England's Carney stifles UK rate hike talk


UPDATE 2-Bank of England's Carney stifles UK rate hike talk

* BoE governor still far from backing interest rate rise
    * Carney cites weak wage growth, likely Brexit hit
    * Sterling, gilt yields drop after Mansion House speech
    * Hammond urges interim trade deal under Brexit

 (Adds detail)
    By David MillikenLONDON, June 20 (Reuters) - Bank of England Governor Mark
Carney doused speculation that he might soon back higher
interest rates, telling bankers on Tuesday that he first wanted
to see how the economy coped with Brexit talks in coming months.
    Sterling slid by more than half a cent after Carney
distanced himself from three other BoE rate-setters who said
last week that rates should start to rise for the first time in
a decade.
    "Now is not yet the time to begin that adjustment," he said
in an annual speech at London's Mansion House.
    The BoE has found itself in an awkward position. Inflation
is rising quickly after falls in the value of sterling since
last summer's Brexit vote, while signs of weakness in the
economy are increasing, including a slowing of pay growth.
    The economy has also been hurt by uncertainty about the
Brexit negotiations, which started on Monday, and a murky
political outlook further clouded by elections on June 8 in
which Prime Minister Theresa May lost her parliamentary
    Finance minister Philip Hammond, who has sought to soften
May's at times confrontational tone towards the bloc, told the
same Mansion House audience that Britain faced a challenge to
secure appropriate transitional trade arrangements with the EU
before it left the bloc in 2019. [nL8N1JH1EX]
    Carney sounded a similar note of caution, saying that if
there was insufficient progress on creating a Brexit transition
period, businesses might start to activate their own contingency
    It was in any case too soon for the BoE to start raising
borrowing costs "given the mixed signals on consumer spending
and business investment, and given the still subdued domestic
inflationary pressures, in particular anaemic wage growth," he
    Carney also took a swipe at one of the leading Brexit
campaigners, foreign minister Boris Johnson, who last year
dismissed the idea of trade-offs in the EU divorce process by
saying his "policy on cake is pro having it and pro eating it".
    The BoE governor said: "Before long, we will all begin to
find out the extent to which Brexit is a gentle stroll along a
smooth path to a land of cake and consumption."
    He made it clear he saw the squeeze on spending power
continuing. "Monetary policy cannot prevent the weaker real
income growth likely to accompany the transition to new trading
arrangements with the EU."

    Last year, pro-Brexit campaigners criticised Carney for
emphasising the risks of leaving the EU during the referendum
campaign, and for forecasting a sharp economic slowdown after
the vote, which did not immediately materialise.
    But Britain saw the weakest growth of the world's seven
largest advanced economies in early 2017, and some of the other
costs of the Brexit vote are now materialising, placing the BoE
in a dilemma.
    Sterling's post-referendum fall of more than 10 percent is
feeding through into inflation, which has hit its highest in
nearly four years at 2.9 percent and is squeezing consumer
    The currency's further fall since the election looks set to
push inflation above 3 percent, the BoE said last week.
    For three policymakers that justified undoing last year's
rate cut, but Carney made clear he was in no rush to join them.
    "In the coming months, I would like to see the extent to
which weaker consumption growth is offset by other components of
demand, whether wages begin to firm, and more generally, how the
economy reacts to ... the reality of Brexit negotiations."
    Economists said Carney appeared further from raising rates
than other officials who voted last week to keep rates steady.
    "The Governor outlines his personal perspective which
appears to imply the decision for him to hold policy steady was
not (finely) balanced, in contrast with some of his colleagues,"
Investec economist Victoria Clarke wrote.
    In a sign of concerns that could hold back investment, car
maker Honda <7267.T> said its supply chain would seize up if
Britain left the EU without a customs deal. [nL9N1IR041]
    Hammond - who has paid more heed to business worries about
Brexit than most of his Conservative colleagues - has said
Britain will withdraw from the EU's customs union as part of
Brexit but hopes a separate deal will avoid long border delays.
    "Our departure from the EU is under way. But ensuring that
it happens via a smooth pathway ... one that protects jobs,
prosperity, and living standards in Britain will require every
ounce of skill and diplomacy," he said on Tuesday.
    The Mansion House event was rearranged from last week after
a fire in a social housing block in London killed at least 79

 (Editing by William Schomberg and John Stonestreet)
 ((david.milliken@reuters.com; +44 20 7542 5109; Reuters
Messaging: david.milliken.thomsonreuters.com@reuters.net))


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