Bank’s MPC will monitor Brexit inflation

 UK temperatures reached record highs in July, but the UK economy has not been heating up this summer. Instead, as world trade tensions and worries about a no-deal Brexit have risen, the economy has been slowing down. 

Growing Tensions

On 1 August, the Bank of England’s Monetary Policy Committee (MPC) kept Bank Rate at 0.75% and lowered its forecasts for UK growth this year and next. 

Businesses in major foreign economies are investing less because trade tensions have made them less certain about future demand for their products. As foreign economies slow, so does foreign demand for UK products.

Meanwhile, in the UK, uncertainty surrounding Brexit has been having an especially negative effect on business investment. 

I’ve been asking my business contacts here in Greater London about these issues, and my fellow Agents have been doing so in the rest of the UK.

Throughout the country

Across the UK, around three in every 10 of our contacts are now even more uncertain than they were ahead of the extension of Article 50. Only one in 10 is more certain. 

We reckon that investment this year has been as weak as it has been in almost a decade, and this has been acting as a drag on the economy. 

That is despite solid household spending, supported by the fastest pay growth since 2008 and the lowest level of UK unemployment since the mid-1970s.

The path the UK economy takes over the next few years will depend mainly on what sort of Brexit there is. If there is a no-deal Brexit, then UK economic growth would probably slow further. 

Deal or No-Deal?

Even though three quarters of the business contacts we have asked say they are “as ready as they can be” for no-deal scenarios, they still think investment and demand for their products would fall in the first year of a no-deal Brexit. 

The increased risk of a no-deal Brexit has already caused the pound to fall to its lowest level in two years against other major currencies in recent weeks. 

In no-deal scenarios, inflation could be pushed up by tariffs on imports and further falls in the pound. But lower investment and slower growth could push prices down. The MPC would have to judge how best to act given the balance of these effects.

On the other hand, if there is a deal that allows the UK to move smoothly to a new trading relationship with the EU, then business investment would probably rise, causing growth to accelerate. 

If there is a Brexit deal, the MPC’s judgment is that gradual and limited increases in Bank Rate would be appropriate to keep inflation from being above the 2% target in a few years’ time. Bank Rate is likely to remain substantially lower than before the financial crisis.

But no matter what sort of Brexit there is, the MPC will always act to promote the good of the UK people by keeping inflation on target while supporting jobs and growth. 

Lai Wah Co is Deputy Agent for the Bank of England’s Greater London Agency @BoELondon

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