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Bank of England’s Carney says UK reliant on buoyant consumers

By David Milliken and Andy Bruce | LONDON

Bank of England Governor Mark Carney said on Monday that he would keep a close eye on British consumers this year to see if their buoyant mood since June’s Brexit vote persists in the face of higher inflation.

Britain had one of the world’s fastest-growing advanced economies last year, but the central bank has forecast growth will slow in 2017 as inflation rises above target in response to sterling’s slump since the European Union referendum.

In his first speech of 2017, delivered at the London School of Economics, Carney said there were signs that British growth was relying more heavily on consumer spending – rather than investment or exports – which boded poorly for the future.

“Growth is expected to remain below past averages for the next few years. One corroborating indicator of this potential deceleration is that the UK expansion is increasingly consumption-led,” he said in a text provided by the BoE.

The central bank governor said evidence from the past 25 years showed that consumption-led expansions were generally weaker than broader-based ones, as they often became dependent on ever-higher rates of borrowing.

“At present, households appear to be entirely looking through Brexit-related uncertainties,” Carney said, adding that developments in consumer spending and borrowing would be an important factor for the BoE to watch this year and beyond.

British consumer borrowing grew by almost 11 percent in the year to November, its fastest pace since 2005, and earlier on Monday a charity warned of a big increase in calls from people worried about their debts compared with a year earlier.


Carney stuck close to the line on monetary policy that the central bank set out after its November and December policy meetings, and economists expect no change in rates in the wake of next month’s quarterly forecast update.

“The indication is that the Monetary Policy Committee is currently comfortable with its neutral stance,” IHS Markit chief UK economist Howard Archer wrote to clients after the speech.

The BoE cut rates to a record low 0.25 percent in August and started a six-month programme of government bond purchases to boost an economy which appeared to be entering a slump after June’s vote to leave the EU.

However, the economy subsequently performed much more strongly than economists expected. In November, the BoE dropped plans to cut rates further, and next month policymakers will need to decide whether to extend the bond purchase programme.

“Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2 percent target,” Carney said, adding that the BoE was willing to tolerate a limited overshoot of its inflation target.

In November the BoE forecast 1.4 percent growth for 2017, after growth of around 2 percent in 2016. The BoE expects consumer price inflation will exceed 2.7 percent by the end of this year – up from 1.2 percent in November 2016 – due to a near-20 percent fall in sterling against the dollar.

Sterling fell below $1.20 to one of its lowest levels in the past 30 years on Monday due to fears Prime Minister Theresa May will prioritise curbing immigration over retaining close economic ties with the EU when she sets out her approach to Brexit talks in a speech on Tuesday.

In a question and answer session after the speech, Carney declined to comment on the latest move or outlook for the currency, merely noting that the exchange rate moved up and down.

(Additional reporting by Alistair Smout; Editing by Alison Williams)

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