2-8-18 2:50 PM EST | Email Article
By Jason Douglas and Paul Hannon 

LONDON -- The Bank of England joined other central banks in warning that recent financial market turmoil won't deter decision makers from tightening monetary policy, saying that stronger-than-expected growth means the bank is likely to raise rates at a swifter pace than it expected to just several months ago.

That message suggests investors are right to believe central banks are pondering more-aggressive action to tame growth in prices amid the first synchronized expansion of the world's biggest economies in a decade.

Concerns that global growth could stoke inflation have fueled sharp swings in stock and bond markets this week. Indeed, the Bank of England's hawkish message came on another day of unsettled and volatile trading in Europe and the U.S.

In comments Thursday, Bank of England officials said borrowing costs will need to rise sooner and faster than they expected in November in order to bring inflation back to their 2% goal within two to three years. Annual inflation was 3% in December.

"It will likely be necessary to raise interest rates somewhat earlier and to a somewhat great extent than we had thought," Gov. Mark Carney said at a news conference. He stressed, however, that increases after that would be slow and steady, a message other central bankers have also communicated recently.

Economists said that a rate rise to 0.75% could come as soon as May, with additional quarter-point increases possible later this year and through 2019. The BOE last raised its benchmark interest rate to 0.5% in November. Officials on Thursday held that rate steady at 0.5%.

Central banks around the world have been slowly reeling back very loose monetary policies after more than a decade of ultralow rates and colossal asset-purchase programs aimed at restoring growth and stoking inflation.

Attention has now turned to just how fast that process of normalization will occur. The Federal Reserve is expected to raise short-term interest rates in the U.S. at least three times this year. The European Central Bank may end its massive bond-buying program after completing the latest batch of purchases in September, and investors expect it to begin raising interest rates in 2019.

German Bundesbank President Jens Weidmann on Thursday urged fellow ECB officials not to allow a rising euro or any turbulence in financial markets to deter them from winding down their bond-buying program after September.

In his remarks Thursday, Mr. Carney, who also heads the Financial Stability Board, a global club of regulators, added his voice to those of officials at the Fed and the ECB who said the past week's market swings won't push them off course.

He played down the possibility that recent market turmoil reflects weakness in the global expansion. Instead, volatility had been unusually low and its return isn't much of a surprise, he said.

"It's certainly healthier when markets have two-way risks around prices, " Mr. Carney told reporters.

Sterling immediately rose on the news, climbing as high as $1.402, up more than 1.1%. Against the euro, the pound also rose 1.1% to $1.144. U.K. 10-year gilt yields ticked higher, rising from 1.55% before the announcement to as high as 1.66% after the release.

The BOE said it expects the British economy to grow 1.8% this year and in 2019, reflecting an improved global backdrop.

Yet the BOE cautioned the U.K. still isn't fully participating in this global upswing due to uncertainties surrounding the terms of the country's exit from the European Union. Those questions are weighing on investment and immigration, officials said, restraining the economy's capacity to expand without stoking inflation.

They added that the outlook on the economy will depend heavily on whether progress is made over the terms of the U.K.'s exit in the coming months.

Write to Jason Douglas at jason.douglas@wsj.com and Paul Hannon at paul.hannon@wsj.com

 

(END) Dow Jones Newswires

February 08, 2018 14:50 ET (19:50 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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