Imperial College London

Bank of England to adopt wait and see approach as Brexit unfolds

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The Bank of England will delay interest rate decisions until it has a clearer picture of how the UK economy will be affected post-Brexit.

This was the view of Michael Saunders, a member of the Bank of England’s Monetary Policy Committee in a speech delivered at Imperial College Business School.

Mr Saunders said: “The possibility that monetary tightening might be needed in future does not necessarily mean we need to tighten now. A range of alternative Brexit outcomes are possible, and these may have very different implications for the economy and monetary policy.”

"For now it makes sense to wait and see how Brexit developments unfold." Michael Saunders External Member of the Bank of England Monetary Policy Committee

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 see how Brexit developments unfold.”

He reiterated the Bank of England’s “monetary policy response to Brexit” by emphasizing how the response “will not be automatic and could be in either direction.” He said the Bank “will always act to achieve the 2 per cent inflation target.”

Some members of the Bank of England’s Monetary Policy Committee have previously suggested that rates may said that rates will need to be cut in the event of a “no-deal” Brexit to boost the economy.

Mr Saunders’ speech outlined how monetary policy is used to achieve the Bank’s inflation targets and how changes in the Bank Rate influence interest rates facing households and businesses.

Economic forecast

Looking at the immediate outlook for the UK economy, Mr Saunders said that “assuming we avoid a disruptive no-deal Brexit and the economy adjusts smoothly to an average of Brexit endstates, some of the current uncertainties in the UK are likely to fade. Moreover, global growth is likely to be underpinned by expectations of more accommodative monetary policies overseas.”

Mr Saunders said that the economy has grown at a “modest” pace by historical norms, as uncertainty weights on business investment and consumer confidence. Growth is forecast to be 0.2 per cent in each of the first two quarters of 2019, down from the 0.4 per cent in each quarter forecasted by the Bank in November.

The Bank kept interest rates unchanged at 0.75 percent in December, as it warned that consumer demand and business investment was probably suffering amid the political impasse over Prime Minister Theresa May’s Brexit deal. 

Welcoming Mr Saunders to Imperial, Professor Francisco Veloso, Dean of Imperial College Business School, highlighted the Business School’s contribution to solving the financial issues facing the economy. He said: “We have 80 faculty members who are at the cutting edge of research, everything from how to conceptualize the price of cryptocurrency to how to price climate change risk.”

The Business School has a longstanding relationship with the Bank of England. Professor Jonathan Haskel, one of the UK’s leading economists, was appointed as an external member of the Bank’s rate-setting Monetary Policy Committee last year. Professor David Miles was previously a member of the MPC until 2015.

 

Reporter

Laura Singleton

Laura Singleton
Communications and Public Affairs