The Bank of England (BOE) is considering various options for a policy response to a possible ‘no-deal’ Brexit, aimed at supporting growth, investment, and business activity, while also keeping inflation in check, and maintaining the pound sterling’s FX rate stability.
Kristian Rouz – A top Bank of England (BOE) policymaker warns that the UK’s interest rates are set to rise quicker than previously expected, as Brexit fears have mostly failed to materialise, while ultra-low unemployment and robust inflation are making the case for tighter monetary policies.
Some say a ‘hard Brexit’, or leaving the EU without a deal, could pressure the BOE to actually cut interest rates to support economic growth. However, a spike in inflation, expected as part of that scenario, would make it harder for the BOE to loosen policies without risking pushing inflation even higher.
External BOE member and Citigroup economist Michael Saunders believes the central bank should continue raising rates at a quicker pace as long as macroeconomic conditions allow for gradual policy normalisation.
Market participants are urging a cut in BOE rates to support lending and business activity, which would in turn allow them to prevent a possible recession – inflicted largely by Brexit-related concerns.But manufacturing groups say the ONS’ reporting is inaccurate due to officials underestimating the actual size of Britain’s industrial capacity.
Some economists point out that the US Federal Reserve could reserve its policy course and start cutting its own interest rates – ending the three-and-a-half year tightening cycle. If that happens, the BOE could find itself in a confusing situation.
On the one hand, continuing to raise rates in the UK amid an easing on the US side could attract new investment into Britain. On the other, the pound could skyrocket against the dollar, decimating UK exports and global competitiveness, which would negatively reflect on GDP growth in the longer-run.
Meanwhile, the BOE’s Broadbent admitted a ‘no-deal’ Brexit could pose a major challenge to British policymakers. He said interest rates could go either ways in case such a scenario takes place.