No-deal Brexit could see interest rates fall, says Bank policymaker
Senior Bank of England official Gertjan Vlieghe says that interest rates may be reduced to near zero per cent should Theresa May’s prime ministerial successor follow through with a no-deal Brexit.
Vlieghe says that rates may fall from their current 0.75 per cent level to provide a buffer for the impact of a disorderly exit from the EU.
In a speech at Thompson Reuters in Canary Wharf, Vlieghe said: “On balance, I think it is more likely that I would move to cut the bank rate towards the effective lower bound of close to zero per cent in the event of a no-deal scenario”.
Vlieghe also said that it was “highly uncertain” as to when such cuts would be reversed, and that it would depend on how the economy adjusts to no-deal and the subsequent inflation.
He said: “It is highly uncertain when I would want to reverse these interest rate cuts, which would either be driven by an improvement in the underlying economy as the disruptive impact of no deal fades, or by upside risks to inflation if the exchange rate and tariff driven boost to inflation puts upward pressure on medium-term inflation expectations.”
Other policymakers at the Bank have previously hinted that interest rates could be reduced in a no-deal scenario but until now none have indicated the extent to which it may happen.
The Bank has also said that the perceived likelihood of a no-deal Brexit has increased since the start of the year, with both Conservative leadership candidates, Boris Johnson and Jeremy Hunt, ready to take the UK out of the EU without a deal if necessary.
Vlieghe has indicated that with a smooth Brexit, the economy could gather momentum with stronger business investment, increased wages and inflation, with interest rates then having to be raised.
He added: “This would justify further limited and gradual rate increases, such that we might reach one per cent in a year’s time, 1.25 per cent in to years’ time and 1.75 per cent in three years’ time, with large uncertainty bands around this central path”.
Vlieghe also believes that the Bank’s Monetary Policy Committee should change its approach in forecasting future interest rates.
“Our current approach is too complex and inefficient, and second, contains inconsistencies.
“A more straightforward approach would be to publish a forecast based on the MPC’s preferred path of policy, rather than on the market path”.