Mark Carney on inflation in a globalised world and the shock waves from China

These remarks were given by Mark Carney, Governor of the Bank of England, at the Economic Policy Symposium hosted by the Federal Reserve Bank of Kansas City.

Recent developments in China can be assessed within this framework.

“First, to the extent to which lower Chinese demand for commodities imparts a positive terms of trade and real income shock on the UK economy, the MPC can look through the temporary disinflationary impact on headline inflation and concentrate on potentially more persistent effects through trade and financial channels. In that regard, a potential further material slowing of growth in China and more broadly in non-Japan Asia, particularly if coupled with material and persistent exchange rate depreciation, could impart further imported disinflationary pressures over the policy horizon. In addition, a persistent tightening of domestic financial conditions as a consequence of increased global risk aversion could re-introduce a headwind to growth and inflation over the medium term.

These are possibilities, not certainties. Their evolution needs to be monitored, not taken for granted. And it should be recognised that the direct exposure of the UK economy to China is relatively modest and that the recent tightening of financial conditions comes on the heels of a prolonged period of sustained improvement. Moreover, realisation of some of a downside risk previously identified by the MPC, if it persists, has to be weighed against ongoing domestic strength, underpinned by credible policy regimes and an increasingly robust financial system. In this regard, developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.

Indeed, as I said recently, the prospect of sustained momentum in the UK economy and the gradual firming of underling inflationary pressures will likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year. To be clear, that opinion doesn’t prejudge any particular decision. But it does indicate that recent events do not yet, to my mind, merit changing the MPC’s strategy for returning inflation to target – a strategy that already reflects the balance of two large gross effects: namely domestic strength on the one hand and disinflationary forces from the combination of the exchange rate and global weakness on the other.

Members of the MPC will continue to monitor a wide range of indicators of domestic economic momentum, domestic costs, and importantly given our discussion today, the outlook for imported disinflation (as part of core CPI inflation amongst others) in determining the precise timing and path for Bank Rate. By doing so, we will retain our monetary sovereignty in a globalised world.”

Share This Article