By David Milliken and Andy Bruce
LONDON (Reuters) - Bank of England Governor Mark Carney said on Thursday investors were underestimating how much interest rates could rise, even as the British central bank kept borrowing costs on hold due to Brexit uncertainty.
Sounding more hawkish than the U.S. Federal Reserve and the European Central Bank, Carney warned investors they were being too relaxed about BoE plans to carry on easing Britain off its financial-crisis levels of near-zero borrowing costs.
"There are insufficient hikes in the current market curve to be consistent with our remit," he told reporters, referring to interest rate expectations embedded in financial market prices.
But for now, the BoE said, there was little risk from waiting to see if Britain can leave the European Union later this year without a big shock to the economy.
Its nine rate-setters all voted to keep its benchmark rate at 0.75 percent on Thursday, as expected in a Reuters poll.
Britain's economy has slowed since the Brexit referendum in 2016 but has fared better than many investors feared.
In some ways, it looks ready for what would be only its third interest rate hike in more than a decade.
Unemployment is at a 44-year low, wages are growing at the fastest pace in 10 years and consumer spending remains solid.
Carney said the Brexit uncertainty was keeping the appropriate level of interest rates artificially low for now.
Markets paid little attention to his blunt message.
Sterling was hardly changed from before the BoE's announcement and futures priced in less than a one-in-three chance of a rate hike this year - lower than what was factored in before Carney spoke.
"Brexit is really painting the Bank of England into a corner at the moment," said Luke Bartholomew, an investment strategist at Aberdeen Standard Investments.
"But there's no escaping the fact that the data broadly points towards a rate hike in the not too distant future. If things keep going on at this rate then I think we'll start to see calls from within the Bank for a hike."
STRONGER GROWTH
The BoE raised its forecast for growth in the world's fifth-largest economy to 1.5 percent, up from the decade-low 1.2 percent it predicted in February, thanks largely to better prospects for the global economy.
During the first quarter of 2019 the British economy probably grew by a relatively strong 0.5 percent due to businesses building up stocks ahead of Brexit, the BoE said - faster than the 0.2 percent growth it forecast in February.
But growth was likely to slow to 0.2 percent in the current quarter, it added.
The new Brexit deadline of Oct. 31, seven months later than originally planned, has removed the immediate risk of a no-deal exit from the EU which hung over the BoE at its last meeting in March, but extends a period of economic uncertainty.
The BoE's updated forecasts showed inflation - currently 1.9 percent - would exceed its 2 percent target in two and three years' time by a similar margin to its February forecasts.
Carney said the overshoot would have been visibly higher were it not for the fact that markets unusually indicate oil prices will fall over the coming years - something which has a mechanical downward effect on the BoE's medium-term inflation forecasts.
The forecasts also reflected financial market pricing which assumed the BoE would not raise interest rates to 1 percent until late 2021 - around 15 basis points less in tightening than was priced in just before February's BoE meeting.
Carney said this appeared primarily to reflect spillover from a softening in policy intentions by the Fed and ECB, rather than a change in the fundamentals of Britain's economy.