Written by By Rachel Dickson, CNN
Highlighting the dangers of an economic shock on Friday, Mark Carney, Governor of the Bank of England, said there is an “urgent need to strengthen” economic resilience in the UK.
“A greater resilience to shocks will help to ensure that the economy can adjust more easily to the next set of challenges and regain its momentum as the economy adjusts to Brexit,” he said in a speech delivered in London.
Sudden and damaging effects on the UK’s economy is “an enduring source of vulnerability,” Carney said.
Bond prices are rising as investors brace for higher inflation and higher interest rates, partly as the price of oil has climbed in recent weeks.
In a letter to the Bank of England’s Committee on Monetary Policy on January 23, Treasury Chief David Gauke said he was “very concerned” that inflation had increased faster than anticipated by the MPC, and said it could “undoubtedly hurt future economic growth.”
The MPC will have to meet on or around February 27 to decide whether to raise interest rates to 3% from the current level of 0.75%. A decision on whether to take monetary policy action at that meeting is due on March 5.
According to Carney, “we may be at the threshold of raising interest rates when our capacity to absorb shocks is not fully evident,” and the next period of sterling weakness is likely to lead to a “harsh reaction from households and businesses.”
“We’ll need to be confident that there is a clearer path to a self-sustaining recovery so we can feel confident we are making the right call,” he said.
Carney warned that 2017 and 2018 were going to be “more difficult” for growth in the UK economy.
While there had been a “great deal of economic progress” since the financial crisis, the economy faced “growing challenges” from the post-Brexit shock, this include weak productivity growth, weak wage growth and the general weakness of the global economy.
Recent economic data has been “lower than hoped” and the data has “been erratic,” said Carney.
The British economy grew by 0.4% in the final quarter of 2018, it was announced last month. That was below the 0.5% expected by economists, while GDP in the three months to the end of 2017 had fallen by 0.2%.
Carney warned, “although things may have started the year slightly better, it is unlikely that today’s data will be the last such wobble.”
The Bank of England announced an additional £20 billion ($26 billion) in liquidity purchases in December, bringing its total quantitative easing program to £435 billion.