Bank of England governor Mark Carney believes the turmoil in China will not affect the timeline of any UK rate hike.
Speaking at a US central banking conference at the end of last month, Carney said that, while the market crash and currency devaluation in China might affect UK inflation, he did not expect them to delay any planned rise in interest rates.
The UK’s direct exposure to China is “relatively modest”, said Carney, adding: “Developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.”
Carney reiterated his view that it would be easier to determine at the start of next year whether an increase in rates was more likely.
“The prospect of sustained momentum in the UK economy and the gradual firming of underlying 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,” he said.
“Recent events do not yet, to my mind, merit changing the MPC’s strategy for returning inflation to target,” he added.
“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,” said the governor.
The comments by Carney make a rate hike in early 2016 more likely, according to IHS Global Insight chief UK and European economist Howard Archer.
“A Bank of England interest rate hike is still much more likely than not in the first half of 2016 and could yet occur in the first quarter despite the current heightened concerns over China and recent financial market turmoil,” he says.
“We still expect interest rates to rise gradually to 1.25 per cent by the end of 2016, 2 per cent by the end of 2017 and 2.5 per cent by the end of 2018,” adds Archer.