Today, rate-setter Michael Saunders, said that the Bank of England should wait and see how Brexit unfolds before making a decision about its next move on interest rates, given that the inflation is “reasonably well behaved” and economic growth is modest.
Saunders said that if Theresa May, the Prime Minister of the United Kingdom secures a deal to ease Britain out of the European Union, it would be necessary for the borrowing costs to increase in a limited and gradual way. However, he said that there are also other scenarios that have different implications for the Bank.
The United Kingdom is scheduled to leave the European Union on the 29th of March, however, May is still seeking last-minute concessions from Brussels in order to secure parliamentary approval and avoid a damaging no-transition Brexit. May has also suggested the possibility of a delay to Brexit
Saunders was one of the strongest advocates on the Monetary Policy Committee of the BoE for higher interest rates ahead of its two rate increases in November 2017 and August 2018. He struck a cautious tone regarding the near-term outlook.
His remards chimed with a generally more downbeat stance that was adopted by the Bank last February that was spurred not only by Brexit but also by a slowing global economy.
In a speech at Imperial College in London, Saunders stated: “The possibility that monetary tightening might be needed in the future does not necessarily mean we need to tighten now.”
He added: “Given that at present economic growth is probably not strong enough to create excess demand and inflation is reasonably well behaved, for now it makes sense to wait and to see how Brexit developments unfold.”
According to the Bank’s forecasts, the economy of the United Kingdom appears to be set for its weakest growth in a decade this year, and the outlook would be worse if Britain leaves the bloc without the cushion of a transition deal.
Answering questions after his speech, Saunders said that the Bank’s plan to gradually increase rates in the event of a Brexit deal did not mean a “fantastically slow” pace of increases.
He reiterated the consensus view of the Bank that policy could shift in either direction after a no-deal Brexit. He also opted not to echo the comments of Mark Carney, the BoE Governor who last week said that the central bank would probably give more support to the economy in such a scenario, even if there were limited options.
Saunders stated: “I am generally unsure about that.”
He added: “There are very few, if any, good examples of countries that have gone through a process of reduced openness in the way that a hard Brexit would imply.”