Mark Carney on inflation in a globalised world and the shock waves from China

by Neil Patterson

11:50 AM, 4th September 2015
About 3 years ago

Mark Carney on inflation in a globalised world and the shock waves from China

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Mark Carney on inflation in a globalised world and the shock waves from China

Mark CarneyThese remarks were given by Mark Carney, Governor of the Bank of England, at the Economic Policy Symposium hosted by the Federal Reserve Bank of Kansas City.

Recent developments in China can be assessed within this framework.

“First, to the extent to which lower Chinese demand for commodities imparts a positive terms of trade and real income shock on the UK economy, the MPC can look through the temporary disinflationary impact on headline inflation and concentrate on potentially more persistent effects through trade and financial channels. In that regard, a potential further material slowing of growth in China and more broadly in non-Japan Asia, particularly if coupled with material and persistent exchange rate depreciation, could impart further imported disinflationary pressures over the policy horizon. In addition, a persistent tightening of domestic financial conditions as a consequence of increased global risk aversion could re-introduce a headwind to growth and inflation over the medium term.

These are possibilities, not certainties. Their evolution needs to be monitored, not taken for granted. And it should be recognised that the direct exposure of the UK economy to China is relatively modest and that the recent tightening of financial conditions comes on the heels of a prolonged period of sustained improvement. Moreover, realisation of some of a downside risk previously identified by the MPC, if it persists, has to be weighed against ongoing domestic strength, underpinned by credible policy regimes and an increasingly robust financial system. In this regard, developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.

Indeed, as I said recently, the prospect of sustained momentum in the UK economy and the gradual firming of underling inflationary pressures will likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year. To be clear, that opinion doesn’t prejudge any particular decision. But it does indicate that recent events do not yet, to my mind, merit changing the MPC’s strategy for returning inflation to target – a strategy that already reflects the balance of two large gross effects: namely domestic strength on the one hand and disinflationary forces from the combination of the exchange rate and global weakness on the other.

Members of the MPC will continue to monitor a wide range of indicators of domestic economic momentum, domestic costs, and importantly given our discussion today, the outlook for imported disinflation (as part of core CPI inflation amongst others) in determining the precise timing and path for Bank Rate. By doing so, we will retain our monetary sovereignty in a globalised world.”



Comments

Neil Patterson

11:50 AM, 4th September 2015
About 3 years ago

Personally I view economic headwinds as giving more uncertainty to grow than the certainty of imminent Bank Base Rate rises.

Luke P

12:19 PM, 4th September 2015
About 3 years ago

Rate cannot and will not rise. Not for a LONG time yet. They may attempt a small rise (just because they feel pressured to justify the MPC's existence and their salary), only to quickly put it back down again.

michael fickling

12:50 PM, 4th September 2015
About 3 years ago

One can hardly call a tax change that allows taxation on turnover... whilst refusing to allow real business costs..ie interest on mortgages "credible"..in fact its a paradigm shift in accepted practice across all westernised nations....so im not sure what he alludes to when he states that we have a credible policy regime?...This specific one is the least credible fiscal change ive ever heard of.

Fact is he and the other "experts" as usual didnt anticipate this latest chinese development ..which is completely typical of macro situations...and his defensive and rather long winded rhetoric cant hide that. They and we just dont know what lies ahead. Rates may rise rates may stay low the cycles go on and their durations become increasingly difficult to anticipate...the "experts" including the governor of the B of E do not have a good history of predicting macro events.

Neil Patterson

12:57 PM, 4th September 2015
About 3 years ago

Unfortunately the BofE have no control over political budget decisions 🙁

David Price

0:26 AM, 5th September 2015
About 3 years ago

When I read Mark Carney's words I was reminded of Stanley Unwin.

Mick Roberts

7:38 AM, 5th September 2015
About 3 years ago

Nice of Neil to find us these things again. We keep plugging away hoping to hear the stories like this.


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