The Bank of England may have to cut interest rates even if a no-deal Brexit is avoided on 31 October, according to a member of the rate-setting monetary policy committee.
Michael Saunders said the economy’s persistent weakness meant a delay to Brexit or even a last-minute deal could still leave policymakers with no option but to cut rates.
The pound fell to a two-week low against the US dollar to $1.2280 as traders calculated that Saunders, who has previously argued that the case for cutting or raising rates is evenly balanced, is leaning towards a cut. This month the MPC voted 9-0 to keep rates on hold at 0.75%.
Saunders said surveys of the business community had shown that firms believed Brexit uncertainty would persist well into 2020 regardless of the outcome of talks. He said: “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 the bank rate would be down rather than up.”
The US Federal Reserve has cut rates twice this year in response to sharply slowing growth and the European Central Bank has relaunched its stimulus programme to cut the cost of borrowing across the eurozone. China’s central bank has also cut bank lending rates, leaving the UK as one of the only major economies to leave interest rates on hold this year.
Official measures of Britain’s economic growth have proved volatile during the spring and summer as firms stepped up preparations for Brexit, only to relax them following a delay. GDP reversed in the the second quarter by 0.2%, but recovered to register a 0.3% growth rate in July.
In a speech to business figures in Barnsley on Friday, Saunders said there was a chance that Brexit uncertainty “falls significantly” and that global growth recovers enough to require an interest rate hike, but he said that is not the most likely outcome.
Saunders said: “Another scenario, and this is perhaps more likely to me, is of prolonged high Brexit uncertainty, even without a no-deal Brexit actually occurring. 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.”
“Of course, the monetary policy implications of either scenario would also depend on other factors, including in particular the exchange rate and fiscal policy,” Saunders added.
The policymaker also said the Bank must take swift action on interest rates no matter the outcome of Brexit, even if it risks changing course later on.
Saunders added that even without a disorderly Brexit at the end of next month, persistently high uncertainty remained likely, which would weigh on business confidence and jobs growth, which would in turn drag down consumer spending.
Fiona Cincotta, a market analyst at City Index, a firm that takes bets on movements in financial markets, said Saunders’ speech was “the first clear statement that the bank is considering a rate cut and the argument is not only Britain based but also reflects the weak state of global economic growth”.
But the consultancy Oxford Economics said the MPC remained split following the more pro-hike tone struck by the BoE’s chief economist Andy Haldane in the summer, when he said he “would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn”. In May, the Bank’s governor, Mark Carney, had argued that a modest economic recovery over the next three years will warrant higher interest rates
Martin Beck, a UK economist at Oxford Economics, said: “For now, we think these differences will be enough to stay the MPC’s hand from loosening policy, and we stick with our view that the next move in Bank Rate will be a rise, albeit not until late-2020.”
