The Bank of England may have to cut interest rates even if the UK avoids a no-deal Brexit as the high uncertainty linked to the event is likely to persist, the bank’s policymaker Michael Saunders said in a speech on Friday.
“I think it is quite plausible that the next move in Bank Rate would be down rather than up,” Saunders said in a speech to the Barnsley & Rotherham Chamber of Commerce & Institute of Chartered Accountants.
The UK is set to exit the European Union on October 31 and Prime Minister Boris Johnson has vowed no delay even if a deal is not reached with the EU regarding future relations. He is fighting opponents in the Parliament who are trying to avert a no-deal Brexit.
The rate-setter said it is more likely that the high Brexit uncertainty would prolong even without a no-deal event actually occurring.
“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,” the policymaker said.
Saunders pointed out that the effect of Brexit uncertainties is akin to the economy developing a “slow puncture” that causes growth to just a crawl.
The rate-setter expects the UK to face further cliff edge situations even if it avoids a no-deal Brexit, thus retaining the persistently high uncertainty.
Under such a scenario, the economic outlook would probably be considerably weaker than the central forecast in the August Inflation Report, though significantly less adverse than a no-deal Brexit, Saunders said.
After maintaining status quo this month, the Bank of England said the Brexit-related developments are making UK economic data more volatile. Political events could lead to a further period of entrenched uncertainty, the central bank said.
The bank forecast 0.2 percent growth in the third quarter and expects inflation to remain slightly below the 2 percent target in the near term.
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