Bank of England Deputy: Brexit Does Not Necessarily Imply Lower Interest Rates

 Photo by: George Rex, Flickr Uploader

According to one of the BoE’s influential deputy governors, the Brexit process will not necessarily push the Bank of England to reduce interest rates.

“The Bank cut its main interest rate after the Brexit vote because of a sharp fall in consumer and business confidence, but the potential impacts from the actual process on monetary policy are difficult to determine,” stated Ben Broadbent, a deputy governor of the BoE.

“The UK is currently in an “inter-regnum” between the vote and the actual start of leaving the EU in which varied expectations make the implications for policy unclear,” added Broadbent.

Speaking at the London School of Economics today, Broadbent stated: “The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more uncertain and more complex.

“They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.”

The Bank increased interest rates for the first time in a decade at the beginning of the month, with Broadbent being one the seven members who voted in favour of the rate rike. Two voted against the increase.

Broadbent said that he acknowledged that there is “room for doubt” regarding the wage outlook. However, he added that he thinks that “the evidence is still consistent with such an inflationary effect.”

At the same time, Broadbent warned that the imposition of higher trade barriers could potentially cause damage to the British economy.

Broadbent stated: “If EU withdrawal results in significant new barriers to trade between the UK and its major trading partners in the rest of Europe, one plausible consequence would be a marked shift in relative demand for UK output.”

While the theoretical impact of a change in demand could be neutral if it moves towards services and goods that produced in the United Kingdom, in practice the adjustment could be hard.  Broadbent stated: “Resources, human as well as physical, are likely to be specialised: they’re more productive in some areas than others.

“A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees.”

In particular, a “no deal” Brexit scenario, in which the United Kingdom reverts to the rules of the World Trade Organisation (WTO), would increase costs for the United Kingdom.

Broadbent stated: “A sudden switch to WTO trading rules would involve the immediate imposition of tariffs on imports, further raising their cost.”