Pound Surges as BOE's Carney Hints at Rate Rise -- 2nd Update

By Jason Douglas Features Dow Jones Newswires

The pound jumped Wednesday after Bank of England Gov. Mark Carney said interest rates in the U.K. may need to rise if the economy keeps motoring despite weak consumer spending.

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Sterling rose 1.1% against the U.S. dollar to $1.2954 following his comments, the highest in three weeks. Yields on 10-year U.K. government bonds jumped to 1.181%, the highest since early May, from the previous day's close of 1.078%.

Speaking at the European Central Bank's forum on central banking in Sintra, Portugal, Mr. Carney said the U.K. central bank's tolerance of above-target inflation is wearing thin as slack in the labor market continues to diminish.

His remarks come a day after the BOE tightened bank capital requirements in Britain and offer further evidence that the central bank's Monetary Policy Committee is inching toward a withdrawal of the extra stimulus it put in place following last year's Brexit vote.

"Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional," Mr. Carney said, according to a text of his remarks.

He said a critical gauge of whether an interest-rate rise is needed will be whether business investment grows sufficiently to offset a slowdown in consumer spending. He added that he also wants to see faster wage growth, and be satisfied that uncertainty over the outcome of talks over the U.K.'s departure from the European Union isn't weighing heavily on activity.

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Mr. Carney's comments mark a slight shift in tone from a speech he delivered last week, when he said that uncertainty over the U.K.'s prospects meant now wasn't the time to begin lifting borrowing costs.

A majority of MPC officials, Mr. Carney included, earlier this month voted to keep the central bank's benchmark rate at 0.25%. But three of the eight who voted broke ranks to argue for an immediate quarter-point increase to tame quickening inflation.

Andrew Haldane, the central bank's influential chief economist, has since signaled that he, too, would favor an interest-rate rise in the coming months if the economy holds up as expected.

On Tuesday, the euro soared to its biggest one-day gain against the dollar in a year and eurozone bond prices slumped after ECB President Mario Draghi hinted the bank might start winding down its stimulus in response to accelerating growth in Europe.

In the U.S., Federal Reserve officials have raised short-term interest rates four times since December 2015 and may do so again later this year.

Jon Sindreu contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

June 28, 2017 10:48 ET (14:48 GMT)