In a major speech on Friday in Nottingham, the Bank of England governor Mark Carney suggested that the UK’s central bank will tolerate an overshoot of its inflation target, stating that supporting economic growth still remains the priority as well as helping cushion the blow of an anticipated rise in unemployment. With the collapse in sterling pushing up import costs, inflation expectations still running high, with the 5-year sterling inflation swap rate trading at 3.45%, up from the lows of 2.90% at the beginning of August (although this has moved down from 3.615 10 days ago).
Carney also did not rule out the prospect for more stimulus, saying the outlook for unemployment meant the measures so far taken by the bank were justified. ‘Our judgment in the summer was that we could have seen another 400,000-500,000 people unemployed over the course of the next few years,' he said, adding 'So we’re willing to tolerate a bit of an overshoot in inflation over the course of the next few years in order to avoid that situation, to cushion the blow.'
With regards to sterling, Carney stated that while it was not the job of the BoE to target the exchange rate, it did not mean that he was indifferent to the level of sterling, however he said 'It does matter ultimately to where inflation is and over the course of two or three years out, it matters to the conduct of monetary policy.' Ben Broadbent, one of the three deputy governors, said sterling’s fall after Brexit has acted as a ‘shock absorber’ for the economy, saying 'having a flexible currency is an extremely important thing especially in an environment when your economy faces a shock that are different to your trading partners'.
Also this morning there is a report in the FT that the UK could continue paying into the EU budget to maintain single-market access for the City of London and other equally important sectors of the UK economy. In the first suggestion that the UK government would pick favoured sectors of the economy to protect, the Prime Minister Theresa May moved to assure Japanese car maker Nissan that trading conditions after Brexit will not change. This comes after a senior manager at Nissan UK warned, 'At the point when we need the next round of investment, if we can’t compete and if the British government doesn’t help us then I will be very, very worried about the future of the factory. We’re a global company; we have to make a decision that makes economic sense.' Nissan produces over 500,000 cars a year at its Sunderland plant, with 76% of them built for export to the EU, whilst the UK car industry and supporting infrastructure employs more than 800,000 people and is responsible for nearly 10% of the UK’s manufacturing output.