One of Bank of England's key policymakers believes a no-deal Brexit could result in a prolonged period with interest rates at a record low level of almost zero. Gertjan Vlieghe, member of the rate-setting monetary policy committee, said he would be prepared to cut borrowing costs aggressively in the event that the UK left the EU without a transition agreement on October 31 this year. The Bank's official position is that interest rates could move in either direction in the event of a disruptive no-deal scenario, as it would need to assess which was the greater threat- recession or rising inflation.
In a talk he gave in London to indicate that he saw the risks of a collapse in demand as greater than the risk of inflation caused by the higher costs of imports triggered by a fall in the value of the pound or by the imposition of tariffs. In his speech, Vlieghe said, "On balance, I think it is more likely that I would move to cut bank rate towards the effective lower bound of close to 0 per cent in the event of a no-deal scenario."
Interest rates were cut to a record of 0.25 per cent in the aftermath of the EU referendum but have since been raised twice to stand at 0.75 per cent. Vlieghe's comments suggest that he would be prepared to support something even more drastic than the emergency rate cut announced in August 2016.
"It is highly uncertain when I would want to reverse these interest rate cuts, which would either be driven by an improvement in the underlying economy as the disruptive impact of no deal fades, or by upside risks to inflation if the exchange rate and tariff driven boost to inflation puts upward pressure on medium-term inflation expectations," he said.
Possibilities of Britain leaving the bloc without a transition agreement has grown since Theresa May announced she was stepping down as prime minister. Tory leadership candidates Jeremy Hunt and Boris Johnson have said they are prepared to opt for no deal if necessary.
Vlieghe said that even with a smooth Brexit, he envisaged that it would be a year before interest rates were raised to 1 per cent and two years before they hit 1.25 per cent. By 2022, depending on the state of the global economy, they might still only be 1.75 per cent, well below their 5 per cent level at the time of the banking crash of 2008.
Just earlier this week, Silvana Tenreyro, another member of the nine-member strong MPC, also warned that the state of the economy made it unlikely that she would vote for higher interest rates. She said, "Coupled with signs of a weaker global outlook, recent developments likely lengthen the period until there is a sufficient pickup in the next few months."
