Bank of England's Carney boosts expectations for August rate hike

By David Milliken

NEWCASTLE, England (Reuters) - Bank of England Governor Mark Carney on Thursday boosted expectations of an interest rate hike next month, saying he had become increasingly confident that the British economy's weak start to the year mostly reflected bad weather.

Sterling hit a day's high against the dollar after Carney said inflation pressures had continued to firm, as the BoE expected, and that there was widespread evidence that slack in the economy had been largely used up.

Carney also warned of the potential costs of a trade war in a speech delivered a week before U.S. President Donald Trump is due to visit Britain.

Last month investors were surprised when three out of nine BoE rate-setters, more than expected, voted for an immediate rise in rates, increasing the chances of a hike in August.

There was nothing in Carney's comments to cast doubt over that view, now the consensus among economists polled by Reuters.

"Domestically, the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate," Carney said in a speech in Newcastle, north England.

"Overall, recent domestic data suggest the economy is evolving largely in line with the May Inflation Report projections, which see demand growing at rates slightly above those of supply and domestic cost pressures building."

Asked after his speech if households would be right to expect a rate rise this year, Carney noted that surveys showed three quarters of households expected rates to increase "over the course of the next year", rising "a bit but not that much".

He said he broadly viewed those expectations as reasonable.

Officials would have enough information to make a decision on rates in August, Carney said, despite not having economic growth figures for the second quarter because of changes to the data release schedule of Britain's statistics agency.

COST OF TRADE WAR

In his speech to the Northern Powerhouse Business Summit, Carney said protectionist sentiment had risen, citing an increase in trade tariffs by the United States and retaliatory measures taken by other countries.

There are signs that a "hostile and uncertain" trade environment has dampened global economic activity, he said.

If a sustained trade war were to emerge, reduced productivity growth would be expected to compound losses to the economy from reduced trade, Carney said.

"The experience of Brexit underscores that the impact of global trade war will be greater the more business confidence is affected, the more financial conditions tighten and - most fundamentally - the more permanent the loss of openness is expected to be," Carney said.

On Brexit, Carney said the BoE's expectation remained for a smooth transition as Britain leaves the European Union, but he added that the uncertainty had hurt investment.

Businesses "have been wondering whether changes to trading arrangements will require them to switch suppliers or find new customers, whether to expand production or even close down certain activities", he said.

(Reporting by David Milliken in Newcastle, writing by Andy Bruce, Editing by William Schomberg and Gareth Jones)