The Bank of England kept interest rates steady on Thursday and hinted at slightly faster future rate rises if Brexit goes smoothly, but warned all bets were off if next March brought a “disruptive” EU departure.
Bank of England Governor Mark Carney said in the event of a no-deal Brexit: "There would be a hit to supply, potentially fairly large and certainly more rapid than one is accustomed to in an advanced economy."
“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.”
“It will be a challenge, without question, and part of the series of judgements we will have to make, are exactly around what you’re pointing to, which is what’s temporary, what’s more persistent (in terms of no-deal Brexit effects) and then the relative balance of that.”
“There would be a need to distinguish between shorter term effects on supply that were caused by logistical challenges - very short and sharp transition challenges... - versus more structural effects on the supply capacity of the economy.”
“At a minimum there will be...a series of logistical challenges, of getting goods through the ports and the knock on effects of those to the ability a number of businesses to produce at full capacity.”
Sterling gains
The Bank of England said its nine rate-setters voted unanimously to hold interest rates at 0.75 per cent, in line with expectations in a Reuters poll of economists, after raising them in August for only the second time since before the financial crisis. Brexit is dominating the outlook for the world's fifth-largest economy, which has seen growth slow since the referendum decision in June 2016 to leave the European Union, and most economists do not expect rates to rise again until mid-2019. Sterling modestly extended gains against the US dollar to hit a day's high after the bank's policy announcement.
Assuming Brexit goes smoothly, the economy was likely to continue to grow by around 1.75 per cent a year, the bank said. This is some way below the rate of above 2 per cent that was typical before Britain voted to leave the EU, but the Bank of Englan said the economy was at full capacity and inflation would take three years to drop from 2.4 per cent now to its 2 per cent target. The economy was expected to start running above capacity late next year, sooner than the bank had forecast in August. - Reuters
