Monday, November 20, 2017

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© Bloomberg. Mark Carney, governor of the Bank of England, walks to an International Monetary Fund Committee (IMFC) opening session during the International Monetary Fund (IMF) and World Bank Group Annual Meetings in Washington, D.C., U.S., on Friday, Oct. 7, 2016. The IMF warned this week that rising political tensions over globalization are threatening to derail a world recovery already seeking a reliable growth engine.© Bloomberg. Mark Carney, governor of the Bank of England, walks to an International Monetary Fund Committee (IMFC) opening session during the International Monetary Fund (IMF) and World Bank Group Annual Meetings in Washington, D.C., U.S., on Friday, Oct. 7, 2016. The IMF warned this week that rising political tensions over globalization are threatening to derail a world recovery already seeking a reliable growth engine.

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(Bloomberg) — Mark Carney is heading into a crucial week in the countdown to a possible Bank of England rate increase in early November.

After the International Monetary Fund meetings where most central bankers fretted about weak inflation even amid robust global growth, the governor returns to an economy that’s almost the mirror opposite. While Brexit is weighing on U.K. businesses, price growth is above target — something for lawmakers to press him on at a hearing on Tuesday.

In Washington last week, Carney stuck to the Monetary Policy Committee’s line that a rate increase would be appropriate in the “coming months,” echoing the message the BOE has been sending since September but declining to be any more specific. This week’s release of inflation, wage and retail figures could help him determine the exact timing.

“The data is going to be everything in terms of getting the message across that a rate hike is justified,” said Peter Dixon, an economist at Commerzbank AG (DE:CBKG). If there’s “higher inflation and strongish retail sales, it would be very difficult not to raise.”

Markets have priced in an 87 percent chance of a 25 basis-point increase on Nov. 2, which would reverse the cut put in place after the Brexit vote in 2016. Pricing suggests another hike in August 2018, though many economists suggest that’s too aggressive and expect a lengthy pause after the first move.

The BOE’s new tone means it’s joining the U.S. Federal Reserve in what’s becoming a global central bank shift away — albeit very slowly — from the ever-more loosening that’s defined policy since the financial crisis. The Fed may raise its key rate again in December, the European Central Bank is debating how and when to scale back its bond purchases, and some lawmakers are pressuring the Bank of Japan to discuss unwinding its own easing program.

At the BOE, the latest U.K. numbers — forecast to show inflation at a five-year high of 3 percent — will be crunched by staff economists as they prepare the projections that hugely influence the MPC’s deliberations. Officials will also have to take into account the impact of the nation’s looming departure from the European Union.

The inflation data on Tuesday coincides with Carney’s high-profile testimony before Parliament’s Treasury Committee, his first such hearing since the general election in June. It may be one of his last public occasions to either reinforce the current policy direction or soften his tone.

The same day, the Organization for Economic Cooperation and Development is due to publish its latest assessment of the economy.

Last week, the IMF said the U.K. was the “notable exception” as it upgraded its global outlook. It sees the British economy expanding 1.7 percent this year, which would be the slowest since 2012, and just 1.5 percent in 2018. But weaker growth has coincided with a hit to potential output, which has inflation ramifications.

“The key, key issue which is starting to get understood is, if growth is slowing but it’s because of weaker supply — potential growth is slowing — that means it could still be an environment where you need to raise rates,’ said Kristin Forbes, a member of the MPC until June this year. “If growth was slowing because of weaker demand, that’s a totally different story.”

(Updates market pricing in fifth paragraph.)

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