Brexit uncertainty ‘could lead to interest rate cut’

September 27, 2019 By Edward Brown

Brexit uncertainty ‘could lead to interest rate cut’

The Bank of England may need to cut interest rates should Brexit uncertainty persist, one of its policymakers has said.

Even if the UK avoids a no-deal Brexit, rates may still need to be cut, Michael Saunders said.

Interest rates have been on hold at 0.75% since August 2018, when they were raised from 0.5%.

Last week, the Bank said Brexit uncertainty meant the UK economy was performing below its potential.

“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,” Mr Saunders told local businesses in Barnsley.

The pound dropped against the dollar after his comments were reported, trading down about 0.4% at $1.2277, before paring losses.

BBC graph showing UK interest rates unchanged since August 2018

Mr Saunders, who is a member of the Bank of England’s Monetary Policy Committee (MPC), said that even without a no-deal Brexit, high levels of uncertainty surrounding the UK’s departure from the EU would persist and act as a kind of “slow puncture” for the economy.

“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,” he said.

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Passively waiting to see what happened with Brexit risked inappropriate monetary policy, and the cost of reversing a rate cut if the outlook improved would be low, he added at the event at the Barnsley and Rotherham Chamber of Commerce and Institute of Chartered Accountants.

“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,” he said.

Policy options

At its last meeting on interest rates, the MPC unanimously held rates at 0.75%.

Mr Saunders said he still agreed with recent Bank guidance that a limited and gradual increase in interest rates would be needed over the medium term, if Brexit uncertainty reduced significantly and global growth speeds up.

In the event of a no-deal Brexit, Mr Saunders repeated the Bank’s position that all policy options would be open, depending on the damage to growth and how much inflation spikes from a further fall in sterling.

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