Bank of England Governor Mark Carney arrives to deliver a speech at the London School of Economics on Jan. 16, 2017.Toby Melville/Reuters
Consumers, the backbone of British economic resilience after the Brexit vote, face fresh headwinds in 2017, according to Bank of England Governor Mark Carney.
Bank of England policy-makers will be monitoring developments closely as the impact of the weakening pound starts to feed through into prices, the Governor said in a speech in London on Monday.
"Recently, there have been signs of continued solid consumer momentum domestically and a stronger growth outlook globally," Mr. Carney said. However, he warned consumption-led growth "tends to be both slower and less durable" as it eventually overtakes earnings, leaving demand more sensitive to household's employment and income changes.
Reiterating the Monetary Policy Committee's neutral stance, Mr. Carney said interest rates can go up as well as down, and that there are limits to the extent to which inflation above the BOE's 2-per-cent target can be tolerated. Households' response to faster inflation as Britain negotiates its divorce from the European Union will be key, he said.
"How household spending evolves, and the intertemporal trade-off that households strike, will be important considerations over the next year," Mr. Carney said. "The MPC will monitor developments in the light of its inflation tolerance, and will explain its assessment and policy stance accordingly."
In a speech that largely focused on the theory behind policy-makers' trade-off between supporting growth and keeping inflation stable, Mr. Carney said there was not a simple rule that could guide their decisions.
Supply shocks like the Brexit decision imply lower growth and higher inflation due to sterling's slide boosting import prices, Mr. Carney said. Because monetary policy primarily affects demand, bringing inflation to target too quickly risks a greater loss of output and jobs. That was why the BOE was right to loosen policy in August, he said.
Britain has faced a series of supply shocks since the financial crisis and has faced this trade-off before. By contrast, the United States and the euro area have seldom faced the trade-off between output and inflation, he said.
Mr. Carney spoke after the pound slid below $1.20 (U.S.) for the first time in more than three months. Prime Minister Theresa May will give a speech on Tuesday that may signal her willingness to quit the European Union's single market for goods and services to regain control of Britain's borders and laws.
Data Tuesday will probably show inflation accelerated to 1.4 per cent in December, from 1.2 per cent. While that's below the BOE's target, it's forecast to breach that level within months.