Three weeks on from a dramatic referendum result, we have little hard information about how the economy is responding.
There have been indications that business confidence and consumer confidence have been affected by the shock outcome. But there has also been a lot of political turbulence, and it is understandable that this has affected the consumer and business mood.
Until recently, the UK political system has been remarkably stable – even through the global financial crisis. We have to look back to the 1970s to find political events as dramatic as we have seen in the past few weeks.
On the political front, things seem to be settling down. Theresa May has become Prime Minister – and the succession has been much quicker than if she had faced a contested election. She has appointed a new cabinet. And while there have been some surprises – such as the appointment of Boris Johnson as foreign secretary – on the economic front, Philip Hammond is a very good choice as the new chancellor. He is an experienced minister who was shadow chief secretary before the 2010 Election.
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In this environment, the Bank of England needs to communicate stability and a sureness of touch. In my view, that means keeping interest rates on hold and not undertaking further Quantitative Easing (QE). There is not much evidence that such measures would benefit the economy. We have already had 0.5 per cent interest rates for seven years, and £375bn of QE has been injected into the UK economy.
Can a further quarter point cut in rates, or a bit more QE, really make that much difference in the current situation?
If the Bank of England is to take some policy action, it needs to be based on solid evidence. We will not have much information about the state of the post-Brexit economy for one to two months, when we will have a combination of economic statistics and business surveys for the period after the referendum.
That will be the time to make a proper assessment, not now, or even in August – when we will still have very limited information.
The Monetary Policy Committee’s (MPC) response yesterday had a stabilising influence on the pound – which helps head off the threat of higher inflation and a free-falling currency. The stock market dipped a bit, but is still relatively healthy given all the political and financial turbulence we have seen recently.
There were some hints in the MPC minutes that the Bank might cut interest rates in August. In my view, that would still be a premature reaction. We need to wait until the autumn when the policies of the new government are clearer.
It is not monetary policy changes which are now needed to stabilise the UK economy. What we need is a clear sense of direction about our approach to a crucial set of European negotiations. We also need to see some hard evidence of how the economy has been affected over the summer by post-Brexit uncertainty.
Until these issues are much clearer, the MPC should hold fire.