‘Schrödinger’s Brexit ties Bank’s hands’ on interest rates

Nottingham buses driving towards the edge of a payment revolution
Credit: Shutterstock.com/ igor.stevanovic

The Bank of England’s Monetary Policy Committee (MPC) has voted unanimously to maintain Bank Rate at 0.75%.

At the Committee’s previous meeting, a weaker near-term outlook was expected to lead to a small margin of slack opening up this year. Thereafter, demand growth exceeded the subdued pace of supply growth and excess demand built over the second half of the forecast period.

CPI inflation rose slightly to 1.9% in February and is expected to remain close to the 2% target over coming months. The labour market remains tight and annual pay growth, having risen through 2018, has remained around 3½%. Given continuing weakness in productivity growth, growth in unit wage costs has also risen, although other indicators of domestically generated inflation have remained modest.

The MPC state: ” the economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The MPC judges at this month’s meeting that the current stance of monetary policy is appropriate. The Committee will always act to achieve the 2% inflation target.”

Responding to the Bank of England’s decision, Tej Parikh, Senior Economist at the Institute of Directors, says:

“Facing a Schrödinger’s Brexit in just over a week, the Bank of England continues to have its hands tied on interest rates.

“It’s virtually impossible for the Bank to make clear decisions right now while the various unknowns surrounding the future path for the economy linger. The desire to gradually normalise interest rates from their low levels is already complicated by improved wage growth on one side and weakening economic growth on the other, notwithstanding calculations over the Brexit process. All eyes will now be on any potential further communications from the Bank on how it might support liquidity and confidence in the event of a possible no deal.

“The difficulty for the MPC in outlining its plans for interest rates is just another example of how political uncertainty has paralysed the UK’s domestic economic policy.”