Bank of England may need to U-turn on rate hikes, warns think-tank
Niesr said the Bank will likely ‘weigh the consequences of getting it wrong’ ahead of this week’s interest rate vote.
The Bank of England should raise interest rates on Thursday but “stand ready” to reverse the hike if Brexit talks do not go as planned, according to an influential think-tank.
The National Institute of Economic and Social Research (Niesr) said the Bank will likely “weigh the consequences of ‘getting it wrong’” ahead of this week’s vote on whether to raise interest rates to the highest level for more than nine years.
Niesr said the Bank of England should only raise rates gradually and “stand ready to move in either direction should circumstances change”.
“The committee should emphasise the uncertainty (rather than the certainty) of its future policy stance in its communications and its willingness to reverse its decisions,” according to Niesr.
Policymakers on the Bank’s nine-member Monetary Policy Committee are expected to increase rates from 0.5% to 0.75% in Thursday’s noon decision, but economists believe it will be a split vote.
Niesr’s warning came as its latest set of forecasts pencilled in UK growth of 1.4% this year and 1.7% next year – broadly in line with its previous forecasts.
The predictions assume a “soft Brexit” scenario – where the UK achieves close to full access to the EU market for goods and services – and an increase in rates from 0.5% to 0.75% on Thursday, with rates hitting 1.25% in 2019.
The UK economy is facing an unusual level of uncertainty because of Brexit National Institute of Economic and Social Research
Niesr said the Government’s White Paper Brexit proposals are “more restrictive” than a soft Brexit.
It estimates that if Prime Minister Theresa May’s proposals are achieved, it will cost the economy the equivalent of £500 per person in lost output each year over time, compared with a soft Brexit scenario.
Niesr said this would rise to £800 per person in the event of a “no deal” Brexit.
“These estimates do not include the likely impact on productivity which could, on some estimates, double the size of the losses,” it said.
It said: “The UK economy is facing an unusual level of uncertainty because of Brexit.”
“The UK Government’s White Paper, which set out its preferences for that new relationship, has failed to unite the Government or Parliament, leaving open an entire spectrum of possible outcomes,” it added.
Niesr also warned that the Government would have to make “significant concessions” to the EU for its White Paper proposals put forward last month to succeed.
On spending, it said pressure to increase funding for the NHS and public sector workers will fail to see government spending as a share of GDP fall, in contrast to forecasts by the Office for Budget Responsibility (OBR).
The Budget deficit will therefore remain close to 2% of GDP over the next five years instead of the OBR’s forecast of 1%, according to Niesr.