The Bank of England risks upsetting the economy if it changes interest rates before there is more clarity about Brexit, some of the City’s top economists have warned.
Ahead of the Bank’s key meeting tomorrow, City A.M.’s shadow monetary policy committee (MPC) has said worries over slowing economic growth are outweighed by growing concerns that Britain is heading towards a no-deal exit.
There were two dissenters arguing for a cut, however, including shadow MPC’s guest chair, who said the slowing economy needs a boost.
But the consensus was that the Bank should “wait and see”, just as it has done since August 2018, and leave the main interest rate at 0.75 per cent.
What City A.M.’s shadow MPC decided
Guest chair: Simon Ward, Janus Henderson
The bank rate rate should be cut to 0.5 per cent. The economy has stalled and may be starting to contract. Labour market resilience is crumbling. Brexit is only part of the story: weakness also reflects global softening and the misguided August 2018 rate hike when money measures were slowing sharply. Annual growth of broad money has since slumped to two per cent, suggesting a medium-term inflation undershoot. MPC members will be concerned about sterling weakness, and may want to reserve ammunition in case of a no-deal Brexit, but there are greater risks from delaying necessary policy action.
Ruth Gregory, Capital Economics
If there’s a no deal Brexit, rate cuts are in the pipeline. But if not, with looser fiscal policy in store, rates may eventually have to rise to compensate.
Kallum Pickering, Berenberg
Intensifying Brexit uncertainties and weak global demand warrant a ‘wait and see’ approach. In an orderly Brexit rates may need to go up. In a hard Brexit rates would need to come down.
Jeavon Lolay, Lloyds Bank Commercial Banking
There is a strong case for waiting for further news at this juncture. Recent signs of the global economy softening and continuing uncertainty around the domestic outlook argues for added caution.
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Erik Norland, CME Group
With inflation near target, economic activity slowing, joblessness beginning to rise and Brexit-related uncertainty weighing on growth, I would vote to cut rates by 0.25 percentage points to 0.5 per cent. If growth rebounds, the MPC can always hike rates later on.
Vicky Pryce, CEBR
Despite likely upward pressure on inflation from renewed sterling weakness, signs of a slowdown are accelerating and worries of a no-deal Brexit will keep investment and growth muted.
Peter Dixon, Commerzbank
Although there are significant downside Brexit risks, the sensible strategy is to await more concrete information. Moreover, a rate cut now might exacerbate the weakness of sterling which could intensify the inflation squeeze on households. It will pay to wait.
Tej Parikh, Institute of Directors
The probability of a disorderly Brexit appears significantly heightened. As the economy goes through this awkward period, it’s difficult to justify taking a hawkish approach to rate setting.
Joshua Mahony, IG
Until October comes around, your hands are tied on monetary policy. The key would be to set out forward guidance for a rate cut in the event of a no-deal Brexit.