MNI POLICY: BOE Carney: Market Rate Assumptions Understandable

-Carney Says Market Views For Prolonged Hike Period "Entirely Understandable"

By David Robinson

     LONDON (MNI) - Bank of England Governor Mark Carney once again refused to

criticize market rate assumptions which point to no hike through 2020, even

though the BOE Monetary Policy Committee's guidance has pointed to limited and

gradual tightening.

     Earlier this week money market pricing based on SONIA, the sterling

overnight rate, put around a 50% chance on a cut within a year. In a broadcast

interview with The Economist, however, Carney stressed that this was down to

differences in Brexit assumptions rather than any market misjudgement.

     The key points from The Economist interview were:

     -Carney stressed that while the MPC forecasts were conditioned on a smooth

Brexit, markets were placing substantial weight on a disruptive no deal one.

     The MPC scenario is that "in the event of a smooth Brexit .. what we would

see is the gradual building of inflation pressures."

     With inflation currently at the 2% target and unemployment below 4% "you

would see some inflationary pressure pick-up and in that event, (where) there is

a deal, there is a smooth transition, the economy picks up (and) we would

tighten a bit," Carney said.

     -What markets are doing, however, is to fully factor in the political risks

and the chance of a disruptive Brexit.

     "What the market is doing, entirely understandably, is putting a fairly

heavy weight on the possibility that there won't be a deal, or that there will

be a very protracted period of uncertainty," Carney said. "In that event, in the

markets' judgement, then it wouldn't be appropriate to raise interest rates."

     "And so what you are talking about is two different scenarios, two

different paths for the economy."

     -Carney accepted that if there were to be no Brexit deal, "then the path of

policy could well be different."

     He has previously said that he thinks easing is the most likely outcome in

the event of no deal while stressing that the MPC could not tolerate a prolonged

inflation overshoot.

     He repeated that a hard Brexit would be a hit to supply, which would fuel

inflationary pressure.

     In its August Inflation Report round the MPC will consider how best to

clarify the different scenarios around Brexit.

     -Carney's term as Bank governor is scheduled to end in January 2020 and

this week there has been speculation citing him as a candidate to take over the

International Monetary Fund, with current head Christine Lagarde slated to

succeed Mario Draghi in running the European Central Bank.

     Carney simply observed that he believed Lagarde was "absolutely

outstanding" but he offered no insight into his future job prospects or who his

successor is likely to be.

     A recent media report put the name of Christopher Giancarlo, the US

Commodity Futures Trading Commission head, based in Chicago, in the frame to

replace Carney.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]