Bank of England MPC members want more than just lower interest rates

Jake Cordell
Follow Jake
Two members of the rate-setting Monetary Policy Committee (MPC) have now called for a big stimulus package
Two members of the rate-setting Monetary Policy Committee (MPC) have now called for a big stimulus package (Source: Getty)

One of the Bank of England's interest rate setters has said the looming cut to interest rates might not be enough to support the UK economy.

Gertjan Vlieghe, the newest member of the nine-strong monetary policy committee (MPC), wrote in the Financial Times today that the UK is heading for a period of "lower growth and higher inflation for a period, as a result of weaker demand, weaker supply and a lower exchange rate," following the EU referendum.

Vlieghe was the only member of the MPC to vote to cut interest rates even further from their historic low of 0.5 per cent at last week's meeting of the committee, despite markets putting the chances of a cut to rates at nearly 80 per cent on the eve of the meeting.

Instead, the committee held firm, but indicated it was all but certain to bring rates down at its next meeting at the beginning of August. Immediately after the UK voted to leave the EU, markets moved to expect further monetary policy easing and the governor of the Bank, Mark Carney, indicated all options remain on the table, raising the possibility interest rates could be cut close to zero along with another bout of quantitative easing.

Read more: The City reacts to the MPC's shock decision to hold interest rates

Vlieghe said although a headline rate of 0.5 per cent may seem low, in the new era were inflation and central bank rates are expected to be lower for longer: "We have not been providing as much stimulus as you might think, because interest rates are not all that far below this lower neutral level."

Explaining his decision to vote for a cut to interest rates last week, Vlieghe, who previously worked for the Bank as a top adviser to former governor Lord King, said: "I favoured an immediate interest rate cut, to be supplemented by a package of additional measures in August. What precisely that package should look like will have to be discussed over the course of the next three weeks."

Earlier last week, Andy Haldane said he also expects interest rate cuts alone to be insufficient in the aftermath of the UK's decision to leave the EU. Speaking in Wales, the Bank's chief economist who also sits on the MPC said: "Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary.

"And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined."

In a sign at the degree of surprise at the Bank's decision to hold rates last week, even City A.M.'s Shadow MPC, led by Brexit campaigner Gerard Lyons and usually more hawkish than the real MPC, would have voted to cut rates.

Related articles