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Investors are too relaxed on rates, says Carney

London

BANK of England governor Mark Carney said investors were underestimating how much the central bank could raise interest rates even as it kept borrowing costs on hold on Thursday due to Brexit uncertainty.

The BoE said there was little immediate risk from waiting for a clearer view of what Britain's departure from the European Union would mean for the economy and its nine rate-setters all voted to keep its benchmark rate at 0.75 per cent.

But Mr Carney made clear his view that investors were too relaxed about the pace at which the BoE could resume its gradual rate increases to ease Britain off the stimulus of low borrowing costs that has been in place for more than a decade.

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"There are insufficient hikes in the current market curve to be consistent with our remit," he told reporters.

The BoE's position that higher borrowing costs will be needed in future represents a more hawkish stance than either the US Federal Reserve or the European Central Bank.

The BoE upgraded its forecast for growth in the world's fifth-largest economy to 1.5 per cent, up from the decade-low 1.2 per cent it predicted in February, largely reflecting better global economic prospects.

"The underlying path of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential," the BoE said.

Sterling whipsawed after the central bank's announcement and as Mr Carney began a news conference but was largely in line with its level of earlier on Thursday at around US$1.3050.

During the first quarter of 2019 the economy probably grew by 0.5 per cent due to businesses building up stocks ahead of Brexit, the BoE said - a faster rate than the 0.2 per cent growth it forecast in February. However, the central bank expects growth to slow to 0.2 per cent during the current quarter.

Britain's departure from the EU, originally due for March 29, was delayed last month until Oct 31, unless parliament approves a deal sooner.

This removes the immediate risk of a disruptive, no-deal Brexit which hung over the BoE at its last meeting in March, but extends a period of economic uncertainty.

The BoE said this made some economic data, such as business surveys, harder than normal to interpret.

"More generally, there remained mixed signals from indicators of domestically generated inflation and the cost of waiting for further information was relatively low," the BoE said, adding it continued to assume Brexit would go smoothly. REUTERS