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Bank deputy governor warns over post-Brexit 'economic shock'

Published 28/09/2016

The Bank of England delivered a bumper stimulus package in response to the Brexit vote in August, including cutting interest rates to a record lowof 0.25%
The Bank of England delivered a bumper stimulus package in response to the Brexit vote in August, including cutting interest rates to a record lowof 0.25%

Further stimulus is likely to be needed as the UK faces up to a "sizeable economic shock" because of Brexit, a key member of the Bank of England's Monetary Policy Committee (MPC) has said.

Minouche Shafik, the Bank's deputy governor for markets and banking, said i n a speech to Bloomberg's Markets Most Influential Summit that uncertainty surrounding Brexit negotiations is weighing on investment.

"There is no doubt in my mind that the UK is experiencing a sizeable economic shock in the wake of the referendum," she said, noting that any reduction in economic "openness" is expected to hit growth.

"It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn't turn into something more pernicious."

Her comments come after the Bank delivered a bumper stimulus package in response to the Brexit vote in August, which included a cut to the key interest rate to record lows of 0.25% and extending the quantitative easing (QE) programme.

Ms Shafik said the timing of fresh stimulus "will depend on the continued evolution of the data over the coming weeks and months".

However, she noted there has been a "welcome improvement in forward-looking indicators" which suggest that the economic slowdown might not be as bad as originally feared.

Bank of England Governor Mark Carney earlier this month defended the central bank's August easing measures for helping to cushion the blow of the Brexit vote.

Nevertheless, policymakers have indicated that another rate cut is likely by the end of the year, to a little above zero, with economists expecting more measures in November when the Bank will have its next set of economic forecasts.

The MPC confirmed in the September rates decision that more action was likely unless the economy showed a markedly better-than-expected performance.

Ms Shafik said "deep structural forces" beyond the the Bank's control had forced the MPC to rely on less conventional tactics, including bond purchasing programmes.

She said the Bank had anticipated criticism over such unconventional monetary policy, including claims that banks are unable to pass through ultra-low interest rates, and that QE negatively impacts pension funds and insurance companies.

"We are aware that some of our policies have spillovers and side-effects, but we take steps to address them where feasible to do so within our mandate," she said.

Ms Shafik announced earlier this month that she will be stepping down from the Bank of England at the end of February next year to become the director of the London School of Economics (LSE).

She joined the Bank in August 2014 after previously working at the International Monetary Fund (IMF) and the World Bank.

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