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Modest rate hikes needed even as inflation cools, says Carney

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Mr Carney: "We think the momentum in the economy is going to reassert."

London

MARK Carney said the Bank of England still intends to deliver "modest" tightening after an unexpected economic slowdown derailed an interest-rate hike that investors had anticipated as soon as this month.

The governor was speaking after officials kept the key interest rate on hold at 0.5 per cent after a first-quarter slump, and said inflation will weaken faster than previously anticipated. Money markets shifted to no longer fully priced in an interest-rate increase this year.

"We think the momentum in the economy is going to reassert," he told reporters in London.

"The Monetary Policy Committee judges that an ongoing, modest tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target." The MPC voted 7-2 to hold the rate steady, as predicted by all but three of 54 economists in a Bloomberg survey. Ian McCafferty and Michael Saunders reiterated their support for an immediate increase.

Money markets now show the probability of an August increase in borrowing costs as only about 50 per cent, and a hike by the end of the year - previously fully priced in - at about 85 per cent. Sterling initially declined but recouped some of those losses as MR Carney spoke. It was down 0.2 per cent at US$1.3527 as of 12.58 pm in London.

The decision ends a roller-coaster ride for investors who had expected an increase until a few weeks ago, when data revealed a near standstill in economic growth and slower-than-expected inflation. While the BOE keeps alive the prospect of tighter policy to come, its statement suggests a gentle pace.

Explaining their decision to stand pat this month, the majority of the MPC noted the recent weak numbers. They said that "the costs to waiting for additional information were likely to be modest, given the need for only limited tightening over the forecast period."

"With inflation returning to its target in two years the committee clearly thinks time is on its side. If growth rebounds as we expect in 2Q the next increase in interest rates is likely to come in August,"said Dan Hanson, Bloomberg Economics.

New forecasts from the central bank showed inflation will slow more sharply, falling to the 2 per cent target in two years. But it said this is partly because the pass-through of the pound's depreciation since the Brexit vote is happening faster. It still sees a small amount of excess demand in the economy by early 2020.

The Inflation Report also showed that about one quarter-point hike a year will be needed to return inflation to the goal after the first increase in a decade last November.

"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon," the BOE said. It repeated its well-worn refrain that future increases will come "at a gradual pace and to a limited extent".

The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the US Federal Reserve sticks to its plan to gradually raise rates.

The European Central Bank may now wait until after June to outline its next steps, while the Bank of Japan recently played down when it will reach its 2 per cent inflation target. Sweden's Riksbank and the Bank of Canada have also revised their tightening expectations.

New Zealand central bank governor Adrian Orr said in an interview on Thursday that the bank wants to see wages rise and start to drive up prices before it increases interest rates from a record low. BLOOMBERG

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