Carney says inflation set to surge further amid hard Brexit warnings

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Bank of England governor Mark Carney has said a transition agreement for EU withdrawal is in “everyone’s interest” and reiterated it may be “appropriate” to hike interest rates as Brexit-fuelled inflation is set to rise further.

Mr Carney told MPs that policymakers on the Bank’s Monetary Policy Committee believed a rise in interest rates may be needed over the coming months as it looks to tackle surging inflation caused by the weak pound.

It comes as economists are pencilling in the first rise in interest rates for a decade in November, when the Bank’s next decision and latest set of forecasts are due.

Treasury Select Committee
 Bank of England governor Mark Carney tells MPs the Bank is preparing for a hard Brexit (PA)

He said: “There’s a very limited amount of time between now and the end of March 2019 to transition large, complex institutions and activities.

“A transition agreement is in everyone’s interests.”

But he said the Bank was preparing for the possibility of a hard Brexit without a transition period, although he said there had been “much less” preparation for this in the EU and by member firms.

He also told the Commons committee the Bank is preparing forecasts on the eventuality of a scenario in the middle of the range of possible outcomes of negotiations.

On interest rates, he said: “Having made progress over the last 14 months, the economy having created almost 400,000 jobs … having used up most spare capacity, having seen some early evidence of building domestic pressures, the judgment of the majority of the committee is that some raise in interest rate in coming months may be appropriate in order to have that sustainability.”

The central bank boss said inflation is expected to peak above 3% in October or November, meaning it is “more likely than not” he will have to write a letter to the Chancellor explaining why inflation is more than 1% above target.

But he said the rise in inflation was “anticipated”, given the tumble in the value of the pound since the Brexit vote, which has been pushing up the cost of goods and services in the UK.

Inflation is expected to ease back after the autumn peak, but Mr Carney warned that the MPC expects the effect of the Brexit-hit pound to keep inflation above the 2% target for three years.

Treasury committee member Alister Jack asked whether it would have been better for the Bank of England to raise interest rates in order to support the pound rather than cut them to a record low of 0.25% in the wake of the Brexit vote.

The Conservative MP for Dumfries and Galloway asked whether the interest rate cut was “unnecessary”.

But Mr Carney defended the Bank’s decision.

“No, I wouldn’t agree at all. The movement in the pound … has largely been determined by the prospects for that trade and investment deal with the European Union and has fluctuated largely around both the expectations of the scale of the deal, and the timing of that deal.”

Earlier in the day, official figures showed inflation surged to a five-year high of 3% in September as rising food and transport costs upped the financial pressure on households.

Consumers have been feeling the pinch as the Brexit-hit pound bumps up everyday prices and wage growth tracks behind inflation.

It has meant mounting pressure on the Bank to act by raising interest rates.

The governor’s comments come after his two newest colleagues on the MPC also gave evidence on Tuesday.

Sir Dave Ramsden, deputy governor for markets and banking at the Bank of England, said that in September he “wasn’t in the majority” among MPC members who saw the case for potentially removing some monetary stimulus in the “coming months”.

Recently appointed policymaker Silvana Tenreyro told MPs she would be “minded to” vote for a rate hike in the coming months if data is consistent with expectations.

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