Bank may need to cut interest rates if Brexit deadlock continues
The Bank of England has said that it may have to cut interest rates if uncertainty remains as to which Brexit path the UK will take.
With the Bank having indicated last week that uncertainty over the outcome of Brexit was weighing on the economy, Michael Saunders, who sits on the Bank’s Monetary Policy Committee, has now said that rates may still need to come down even if the UK leaves the EU with a deal.
Prime minister Boris Johnson is in pursuit of a new withdrawal agreement with the bloc, but has insisted that Brexit will happen on October 31 as planned even if it means leaving without a deal.
Interest rates have been frozen at 0.75 per cent since August 2018 and the MPC unanimously agreed to keep them on hold at its last meeting on the matter.
Speaking in South Yorkshire at the Barnsley and Rotherham Chamber of Commerce and Institute of Chartered Accountants, Saunders told local businesses: “If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up”.
Saunders says that the uncertainty surrounding the manner of the UK’s exit from the EU would act as a “slow puncture” for the economy should it persist.
Saunders said: “In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing”.
The pound dropped in value against the dollar in the wake of his comments, down by 0.4 per cent to $1.2277 before recovering ground.
Saunders believes that taking a fundamentally passive approach of waiting for a Brexit outcome before adjusting policy in a knee-jerk reaction risks implementing policy that may be inappropriate.
However, it is believed that the cost of reversing an interest rate cut should the outlook improve would be low.
Outlining his own opinion on how policy should be adjusted accordingly, Saunders said: “In general, I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track and accepting that it may be necessary to change course if the outlook changes significantly”.