Bank of England's Carney speaks on inflation report

LONDON (Reuters) - Bank of England Governor Mark Carney and two other policymakers from the Bank gave a news conference on Wednesday after the Bank published its quarterly inflation report. Below are some of their comments: MARK CARNEY, GOVERNOR: PASS THROUGH OF STERLING STRENGTH INTO ECONOMY Relative to the February inflation report we've seen a 4 percent increase in the effective exchange rate of sterling, so we have to try to determine what's happened with the past pass through, but we'll have some future pass through if these types of moves persist. SCEPTICAL THERE WILL BE SECULAR STAGNATION (If you mean) an era of permanently lower potential productivity growth ... I would say the jury is very much out on that. My personal view is twofold, one I'm sceptical of that for many reasons but one of them is just the nature of broader scientific progress ... but much more fundamentally you have a series of countries, the UK included, that are not at the productive frontier. We still have a fairly large level gap that we can make up over time relative to the most productive economies. RECENT MOVE UPWARD IN BOND YIELDS If you look at the broad brush in terms of where the bond market is, even with the moves upwards, it is only partial retracement of moves over the course of the past year (...) More broadly real interest rates are still flat to negative for quite some time. STERLING STRENGTH AND INTEREST RATES For the appropriate path of rates it (sterling strength) is relevant. NO MECHANICAL LINK BETWEEN OUTPUT GAP AND RATES There's no mechanical link between the output gap and the stance of policy. One of the things we have to be careful about, and it goes ultimately back to equilibrium interest rates and headwinds, is not to get into a situation where the gap is closing, we think the gap is going to close, there's an adjustment of policy and then the gap doesn't close because there's an adjustment of policy. MINOUCHE SHAFIK, DEPUTY GOVERNOR, MARKETS AND BANKING: NEXT BANK RATE MOVE WILL BE UP, NOT DOWN In this round, the consensus view was that the most likely move was up, not down and I think that was the consensus view this time, whereas as you implied in the past, it was not so clear so I would take that as an indicator of the MPC's current thinking. BEN BROADBENT, DEPUTY GOVERNOR, MONETARY POLICY: PRODUCTIVITY PICK-UP OVER NEXT 2-3 YEARS I do take some encouragement from the work we've done over the last three months, if only at the margin, that it's reasonable to expect some growth, i.e. some pick-up in growth in productivity over the next two or three years. MARK CARNEY, GOVERNOR: INTEREST IN NATURE OF MARKET FUNCTIONING We take close interest in terms of the nature of market functioning and some lessons that could be drawn from that but in terms of broad direction, the comment isn't much more than that and I think that in the environment of a sustained global expansion, curves at the extremes, that we saw earlier this year were unlikely to be sustained in the fullness of time. LOOKING CLOSELY AT RISKS FROM EU REFERENDUM We are looking at this and we will continue to look at this very closely because it could be an important determinant of the forecast. As with time there's greater clarity about the timing of the referendum, the question, the prospects, all those Issues, as that starts to come into the public domain, it will be relevant. UK BOND MARKETS DO NOT REFLECT EQUILIBRIUM RATE There's a variety of factors that influence bond rates in the UK. Some of it is an estimate of exactly what I've just been talking about, much of it is a spillover from global bond market conditions. We've seen in the course of the last several months a marked influence of conditions in European bond markets that have weighed on yields in the United Kingdom, some of that is reversing now. You can't take a direct mapping from bond markets to where we think the equilibrium interest rate is. EFFECTIVE INTEREST RATE BELOW EQUILIBRIUM RATE I would suggest that we are still in a position that the effective interest rate in the UK is below the equilibrium interest rate, that's why in general the economy is growing above our estimated potential growth, and that's why spare capacity is being used up, and that's why over time inflationary pressures will begin to build. That's a good thing, that's what we want. BOND MARKET MOVES NOT SURPRISING At our most recent meeting the MPC noted that it was uncertain why the yield curve had flattened further over the past year beyond our three-year forecast horizon. In this context, the direction of recent moves in advanced economy bond markets are not particularly surprising. IMPACT OF GREEK CRISIS ON UK ECB action, improvements in euro area fundamentals, and very limited UK exposure, mean that any intensification of the Greek crisis would likely have only a modest downward impact on UK GDP. GROWTH IN LOW PRODUCTIVITY JOBS One insight from our review of supply is that over the past year, some of the weakness in measured productivity reflects so-called compositional effects: there has been disproportionate growth in relatively low productivity jobs, partly reversing what occurred when unemployment rose sharply. PRODUCTIVITY REMAINS HARDEST JUDGEMENT Productivity, though, is not something that monetary policy determines, and among the many uncertainties we face, the timing and extent of any prospective pick-up in productivity growth remains our most difficult judgement. COMMODITY PRICE FALLS The MPC expects the past falls in commodity prices to be relatively short-lived and will therefore look through them in setting policy. Although it could temporarily turn negative in the near term, inflation is expected to pick up notably towards the end of the year as past falls in prices drop out of the annual comparison. WAGE DEVELOPMENTS The more enduring influences on UK inflation will be the evolution of domestic costs, particularly wages relative to productivity and the likely persistent drag from the strength of sterling. PATH FOR RATES WILL HINGE ON SUPPLY The appropriate path for Bank Rate will hinge crucially on the outlook for supply. The composition of supply growth is expected to shift notably over the forecast horizon as slack in the labour market is eliminated and productivity finally begins to pick up. (Reporting by Maytaal Angel, Costas Pitas, Paul Sandle, Li-mei Hoang, James Davey, Sarah Young and Neil Maidment, compiled by Estelle Shirbon)