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Governor of the Bank of England Mark Carney is treading a fine line in his press conference on the bank’s economic outlook.
Mr Carney said there were still “limits to the extent an inflation overshoot can be tolerated” as the BoE said it kept most of its price forecasts unchanged, but still expects inflation to climb above its 2 per cent target this year.
The overshoot was “entirely” down to the weakness in the currency, said Mr Carney.
He added that should wages rise more strongly than forecast, “monetary policy may need to be tightened to a greater degree than current market yields” predict.
Asked to explain the BoE’s higher growth forecasts, he said:
We missed the strength of consumer spending and confidence that has been present throughout this process.
Consumers have not been affected by any of the associated uncertainty around Brexit, and that is to a large degree understandable; the labour market is holding up, and and in part because of our actions, credit is available and it’s cheap if it’s needed.
But he warned this “dynamic will be tested as the year progresses”.
The BoE voted to keep policy on hold by a unanimous 9 votes to nil as it expects the amount of “slack” in the economy to be bigger than estimated.
“We think the economy can run with a lower rate of unemployment without us having to adjust policy”, said Mr Carney.