Carney Rate Hike Signals Something Rotten in the U.K. Economy

Bank of England Governor Mark Carney is ready to raise interest rates from a position of economic weakness rather than strength.

The fastest inflation in four years leaves the U.K. central bank preparing to hike next month for the first time in more than a decade, yet it’s not an accelerating economy fanning those price pressures. Instead, policy makers are being pushed to temper less benign inflationary forces generated by weak productivity and Brexit.

The U.K. has fallen to the bottom of the Group of Seven growth rankings, but also of concern is the fact that it’s far less productive than international peers. For Carney, who’s warned that leaving the European Union could worsen the situation, that means a lower rate of growth is already enough to put a strain on resources, generating unwelcome domestic pressures.

The International Monetary Fund was the latest to sound the alert on Tuesday when it said the U.K. has been the “notable exception” this year among advanced economies. It left its forecast for 2017 expansion at 1.7 percent while raising estimates for the world, U.S. and euro area.

It’s a far cry from Janet Yellen’s buildup to the first Federal Reserve hike in 2015. While she signaled confidence in the economy, Carney has spoken of Brexit-related uncertainties delaying investment, reducing vital labor supply and creating a lower “speed limit.”

The supply capacity of the U.K. will expand at “only modest rates in coming years,” he said last month. While the weaker pound has boosted headline inflation, lower potential growth creates a risk of more persistent pressures as remaining spare capacity is absorbed faster. The BOE already sees inflation staying above its 2 percent target for the next three years.