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BOE's Carney says economy will bounce back

Governor's remarks keep the prospect of higher interest rates on the table

London

BANK of England (BOE) governor Mark Carney said on Tuesday he expected Britain's economy would bounce back from a weak start to the year when it was hit by heavy snowstorms, keeping the prospect of higher interest rates on the table.

Speaking to lawmakers, Mr Carney also denied that the central bank had confused investors and households by not raising interest rates earlier this month, in contrast to what had been widely expected until shortly before the BOE's meeting in May.

"Our view is not that circumstances changed in the first quarter. It's more likely to have been temporary and idiosyncratic factors that slowed the economy," he said, echoing comments he made earlier this month.

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In February, the BOE said rates were likely to go up sooner and somewhat faster than investors had been expecting, prompting financial markets to price in a rate hike at the central bank's May meeting as a near-certainty at one point.

Instead, the BOE's nine rate-setters voted 7-2 to keep rates at 0.5 per cent, their emergency level for most of the decade since the global financial crisis, as they waited to be sure that the first-quarter weakness was a weather-related blip.

Mr Carney said on Tuesday that surveys showed households and firms largely expected a rate hike in 2018 and more increases "at a very gentle pace relative to history" after that.

Mr Carney has given several signals over the past few years about when rates were likely to rise, only to be wrong-footed by twists and turns in the economy.

Britain's economy overall was 1.5-2.0 per cent smaller than it would have been if it had grown as the BOE forecast before June 2016's EU referendum - equivalent to a loss of about £900 (S$1,618) for a household on an average income, he said.

Mr Carney added that his main message - that rates are likely to rise only slowly - has proven correct.

Earlier on Tuesday, Monetary Policy Committee member Gertjan Vlieghe said he expected slightly more interest rate increases over the next three years than the market assumption of just under three 25 basis-point hikes.

"Provided the headwinds from Brexit uncertainty do not intensify in the near term, and ultimately fade over the coming years, I think policy rates are likely to rise, in my central view, by 25 bp to 50 bp per year over the forecast period," Mr Vlieghe said in written answers to questions from lawmakers. "That is a forecast, not a promise, and will depend on how the economy evolves." REUTERS