The Brexit process will not necessarily force the Bank of England to lower interest rates, according to one of its influential deputy governors.
The Bank cut its main interest rate after the Brexit vote because of a sharp fall in consumer and business confidence, but the potential impacts from the actual process on monetary policy are difficult to determine, said deputy governor Ben Broadbent.
The UK is currently in an “inter-regnum” between the vote and the actual start of leaving the EU in which varied expectations make the implications for policy unclear, Broadbent said.
Speaking today at the London School of Economics, he said: “The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more uncertain and more complex.
“They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.”
The Bank raised interest rates for the first time in a decade at the start of the month, with Broadbent among the seven members who voted in favour of the hike. Two voted against.
Broadbent said he acknowledged there is “room for doubt” around the wage outlook, but added he thinks “the evidence is still consistent with such an inflationary effect”.
At the same time, Broadbent warned the imposition of higher trade barriers could damage the British economy.
Broadbent said: “If EU withdrawal results in significant new barriers to trade between the UK and its major trading partners in the rest of Europe, one plausible consequence would be a marked shift in relative demand for UK output.”
While the theoretical effect of a shift in demand could be neutral if it moves towards goods and services produced in the UK, in practice the adjustment could be difficult, he said: “Resources, human as well as physical, are likely to be specialised: they’re more productive in some areas than others.”
He added: “A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees.”
In particular, a “no deal” scenario, in which the UK reverts to World Trade Organisation (WTO) rules, would raise costs for the UK.
He said: “A sudden switch to WTO trading rules would involve the immediate imposition of tariffs on imports, further raising their cost.”