Rates may need to be slashed if Brexit is delayed again, says Bank policymaker
MPC member Gertjan Vlieghe said prolonged uncertainty would continue to weaken the economy.
Interest rates would likely need to be slashed if Brexit is delayed again, a key Bank policymaker has said.
Gertjan Vlieghe, a member of the Bank’s Monetary Policy Committee (MPC), said the Bank would probably need to act to boost the economy in the event of “entrenched” Brexit uncertainty.
In a speech to the MMF Monetary and Financial Policy Conference in London, Mr Vlieghe said: “A scenario of entrenched Brexit uncertainty is likely to keep economic growth below potential, and require some monetary stimulus.”
It comes amid signs of a growing split among the rate-setting committee, after the Bank’s deputy governor Sir Dave Ramsden said in an interview with The Daily Telegraph on Monday that the UK’s slower “speed limit” for growth could weaken the case for lower rates, which currently stand at 0.75%.
The Bank first hinted at the possibility of rate cuts if Brexit is delayed at its last MPC meeting, when it said the longer uncertainties persist, the “more likely it was that demand growth would remain below potential, increasing excess supply”.
“In such an eventuality, domestically generated inflationary pressures would be reduced,” added the Bank.
It marked the first time the Bank had suggested there could be room to lower rates if Brexit is delayed once more.
At one stage, the Bank has said it may need to hike rates even in a no-deal Brexit if a plunging pound sends inflation far above target, though MPC members have been rowing back on this in recent months to stress a cut would be more likely.
Mr Vlieghe reiterated that a no-deal Brexit is “more likely to require monetary stimulus than tightening”.
But he said if a deal can be reached even at this late stage, then the Bank may yet be able to hold off from rate cuts.
“A near-term Brexit deal that reduces uncertainty and gives businesses adequate time to prepare for any future changes in the UK-EU trading relationship might yet stimulate investment sufficiently to prevent the need for easier monetary policy, and put gradual and limited rate hikes back on the agenda, eventually,” he said.
Fellow MPC member Michael Saunders said in a speech last month that it could be appropriate for the Bank to “loosen policy” should Brexit be delayed amid a weakening global economy.
But Sir Dave said in a scenario of prolonged uncertainty he sees “less of a case for a more accommodative monetary position”, with damaged growth hampering the Bank’s ability to cut rates.
Official figures last week showed the economy contracted by 0.1% in August as Brexit uncertainty weighed heavy.
But but a better-than-previously thought performance in July is expected to help the UK avoid recession, with growth standing at 0.3% in the three months to August.
In his speech, Mr Vlieghe also warned the Bank’s “total monetary firepower is considerably less” than before the previous recession.
“We are not at the point where monetary policy has run out of ammunition, but the risk of that happening in the future has clearly risen relative to the pre-crisis period,” he added.