BOURNEMOUTH, England (Reuters) - Bank of England Governor Mark Carney said a global trade war and a no-deal Brexit were growing possibilities but not certainties, and the central bank was focusing on the medium-term inflation outlook to guide its stance on interest rates.
Carney also said in a speech on Tuesday that he believed underlying growth in Britain was running below its potential and was heavily reliant on the resilience of household spending.
The BoE has stuck to its message that interest rates will need to rise in a gradual and limited way if Britain manages to exit the European Union with a transition deal to absorb the economic shock.
Carney acknowledged the differences between that position and the more pessimistic view of investors who do not expect a rate hike in the near term, some of whom are pricing in the possibility of a rate cut by the BoE.
Carney said the central bank was working on the assumption that both candidates to become Britain's next prime minister would achieve their stated aim of reaching a deal with the EU.
However, both Boris Johnson and Jeremy Hunt have said they are prepared to leave without one if necessary, pushing the value of sterling down in recent weeks.
"In the UK, the combination of the relatively strong initial conditions – including a tight labor market and inflation at target – and the prospect of greater clarity emerging in the near term regarding the UK and EU's future relationship argues for a focus on the medium term inflation dynamics," Carney said.
Another risk facing Britain was the impact of trade tensions on the world economy.
"The quality of global growth has deteriorated," Carney said. "Across the G7, the growth rate of business investment has almost halved since its peak in late 2017, leaving the global expansion more reliant on consumer spending and reducing its resilience."
He also noted how sharply markets had reversed their bets on further U.S. rate hikes and were pricing in rate cuts by the Federal Reserve in the face of uncertainty.
"In some jurisdictions, the impact may warrant a near-term policy response as insurance to maintain the expansion," he said.
"Markets are currently pricing in much more stimulus than this, suggesting greater pessimism about trade developments as well as potentially concerns about the absence of inflationary pressures."