Sounding more dovish on monetary policy than he has in recent months, the governor of the Bank of England told CNBC in a rare interview that global weakness, lower inflation and troubles in European economies would influence policy at the bank's meeting next month.
Mark Carney didn't signal any overt change in policy ahead of the meeting, but he was clear that the BOE would incorporate recent economic developments, which have included a downgrade to the global economy by the International Monetary Fund and recent negative growth numbers from Europe.
"There is weakness, more broadly in EMs (emerging markets) and certainly in Europe, and Europe is the largest trading partner of the U.K.,'' Carney said in the interview Saturday. "We have to account clearly for a more modest global recovery, particularly if that is the case in Europe. In addition, we really are concentrating on the labor markets which will be as important as external developments for the path of monetary policy."
Carney's comments were in line with other leading global central bankers at the annual meeting of the International Monetary Fund about the potential impact of global weakness on monetary policy. Federal Reserve Vice Chairman Stanley Fischer said on Saturday, "If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise."
But for Carney, the comments represent a shift. He has been saying for months that the time for rate hikes is drawing closer. But in the CNBC interview, Carney said, "There is weaker global demand, relative to global potential. That is producing a very benign global inflationary environment and that is something that we do certainly take into account."
Markets until recently had priced in that the BOE would be the first of the big global central banks to raise rates. Markets have now discounted a summertime hike for England, and Carney's comments could be seen confirming that change.
When asked if the time for rate hikes was still drawing closer, Carney would only say to wait for the results of next month's meeting.
Regarding recent market volatility, Carney seemed less concerned. He noted that the world had just been through a period of low market volatility and that the recent sharp market swings were a natural result of changing monetary policies and increasingly divergent economies.
"We're seeing some of that the overlay of geopolitical risk, certainly we would have expected it to come in … and you know the prospects that we've been discussing of a slowing has been digested by markets," Carney said. "We have to accept that as some economies emerge from a period of unconventional stimulus there will be some volatility and that in and on itself should not influence the path of normalization of monetary policy."
Carney said developments in the real economy, such as employment and inflation, "will certainly influence" policy.
Carney said he had "full confidence" in the European Central Bank and endorsed ECB President Mario Draghi's speech in Jackson Hole in August calling for fiscal and structural reforms. He praised the capital raised by European banks, but said that global central banks in general had not done enough.
"If you look back, ... recognizing the lag in monetary policies, given the impairment of some transmission mechanisms and given the less-than-perfect knowledge of unconventional policies and effectiveness of unconventional policies, the issue in total has been inadequate stimulus relative to what's been required."