The U.K. faces a prolonged spell of inflationary pressure as it reorients its economy toward new markets and away from the European Union, Bank of England Gov. Mark Carney said Monday.
In remarks prepared for delivery in Washington, Mr. Carney said that Britain's planned departure from the EU in 2019 is already fueling faster inflation in the U.K. as weak investment and falling immigration restrain the economy's capacity to expand.
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He reiterated the BOE's message that interest rates may need to rise "within months" to keep a lid on price growth, after annual inflation hit 2.9% in August, well in excess of the BOE's 2% target.
But he added that he expects these inflationary pressures will persist as the U.K. pivots its economy away from the EU and toward other markets farther afield, a process that he said could take years.
Sterling fell against the dollar as the speech began, dropping back to $1.348, down from around $1.356 just as the speech began and down 0.8% for the day. The pound was down 0.7% against the common currency at EUR1.129. Ten-year British government bond yields dropped too, falling to 1.301%, from 1.327% at Friday's close.
Mr. Carney's remarks come ahead of a speech by U.K. Prime Minister Theresa May in Florence on Friday, in which she is expected to set out the British government's latest thinking on Brexit amid limited progress in exit negotiations.
The U.K. is hoping to move talks in October toward the shape of its future relationship with the EU, but Brussels and other capitals are adamant that London must first reach a deal on citizens' rights after Brexit and how to manage the Irish border, while settling any financial commitments to the bloc that haven't been paid.
In a speech in honor of former International Monetary Fund director Michael Camdessus, Mr. Carney described Brexit as a unique example of "deglobalization" following decades of ever greater integration throughout the global economy.
Though the U.K. intends Brexit to increase its economic links to the wider world, doing so will take time, Mr. Carney said, and the process will weigh on the economy in multiple ways. Exiting from the EU probably will mean lower immigration to the U.K., potentially boosting domestic wage growth, he said, while new barriers to trade likely would lead to higher prices for goods and services.
"On balance, the de-integration effects of Brexit can be expected... to be inflationary," Mr. Carney said, though he added these and other economic effects of Brexit are subject to "tremendous uncertainty" in terms of their scale and timing.
He added that any looming increases in borrowing costs likely will be gradual in pace and limited in extent. The BOE's main interest rate has been held at 0.25% since August 2016. Economists increasingly expect the central bank to nudge up borrowing costs in November.
Central banks including the U.S. Federal Reserve and the European Central Bank are also edging away from easy-money policies. The Fed appears poised next week to start the process of shrinking its portfolio of $4.2 trillion in Treasury and mortgage bonds amid solid if unspectacular economic growth. The ECB is likely to announce plans next month for phasing out its bond-buying program in response to a buoyant eurozone economy.
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(END) Dow Jones Newswires
September 18, 2017 12:45 ET (16:45 GMT)