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Post-Brexit doubts could still hit economy, says Bank of England rate-setter

Published 23/11/2016

A Bank of England rate-setter said post-Brexit uncertainty could still be a blow to the economy
A Bank of England rate-setter said post-Brexit uncertainty could still be a blow to the economy

Post-Brexit uncertainty has been less of a drag on UK growth than expected but could still strike a blow to the economy, a key Bank of England rate-setter has said.

External Monetary Policy Committee (MPC) member Kristin Forbes played down the effects that higher-than-average levels of uncertainty have had on Britain since the referendum.

"The strength of the UK economy during the period of heightened uncertainty before and after the referendum on EU membership suggests that uncertainty is dragging less on growth than has traditionally occurred," Ms Forbes said during a speech at a JP Morgan Cazenove conference in London.

There are only three other times when uncertainty has been as high as it was after the Brexit vote, she said.

"During the 2008-9 financial crisis, during the period of heightened concern about the euro area at the end of 2011, and after the UK left the ERM (European Exchange Rate Mechanism) and sterling was devalued in 1992.

"This uncertainty measure has recently declined somewhat in August and September, but increased again in October to still remain above its historic average."

Ms Forbes, who is one of nine voting members of the MPC, claimed that increased media coverage and a wider range of growth forecasts were together driving higher levels of uncertainty, but that these had little material impact on the economy itself.

She also noted that higher uncertainty tends to lead to tighter credit and lending conditions, but that this has not been the case in recent months.

"Nonetheless, even though heightened uncertainty has recently appeared to have less effect on the UK economy than expected, that does not mean that it has had no effect, or will have no effect in the future."

Recent business surveys have shown that companies have delayed investment or plan to do so within the next year, she explained, adding that there could be "substantial lags" before the effects of heightened uncertainty start to become clear.

"And UK uncertainty measures could quickly shift - up or down - as more details on the future arrangement between the UK and EU are clarified," she said.

Ms Forbes - who is widely seen as one of the more hawkish rate-setters - assured that the MPC will continue to assess the effects of uncertainty, but said the Bank should not change course as a result of uncertainty alone.

"Central banks are accustomed to operating under uncertainty; we must constantly make decisions based on predictions of highly uncertain variables in the future.

"Heightened uncertainty is no reason to change our approach to monetary policy."

Ms Forbes voted in favour of cutting the Bank's key interest to a record low of 0.25% in August, and introducing the new Term Funding Scheme in a bid to cut borrowing cost.

However, she voted against corporate bond purchases and extending the Bank's quantitative easing (QE) programme.

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