BOE Stimulus Needed If Brexit Uncertainty Endures, Policy Maker Says 

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Continued Brexit uncertainty would probably depress U.K. economic growth and require further monetary stimulus from the Bank of England, according to policy maker Gertjan Vlieghe.

In a speech in London Tuesday, Vlieghe also suggested that even in the case of an immediate Brexit deal, the argument for near-term interest-rate hikes had all but disappeared. Economic slack in the U.K. has increased this year, while the global outlook has deteriorated, he said.

The U.K. is at crucial stage in its Brexit talks, racing to secure a deal that will allow it to leave the European Union on Oct. 31. Without it, Prime Minister Boris Johnson may have to seek another delay, although he maintains that a no-deal departure remains a possibility.

In a particularly stark passage of the speech, Vlieghe laid out three possible Brexit scenarios, and his likely response to each:

• A near-term Brexit deal, may “stimulate investment sufficiently to prevent the need for easier monetary policy, and put gradual and limited rate hikes back on the agenda, eventually”
• A no-deal Brexit “is more likely to require monetary stimulus than tightening,” although, “the direction for interest rates is not automatic”
• A scenario where neither comes to pass, and the U.K. faces entrenched Brexit uncertainty, “is likely to keep economic growth below potential, and require some monetary stimulus”

The speech comes amid growing signs of a split on the BOE’s Monetary Policy Committee over the correct way to react to a potential Brexit extension.

Deputy Governor Dave Ramsden said in an interview with the Daily Telegraph this week that there was “less of a case for a more accommodative monetary position” amid the “entrenched uncertainty” another delay would bring. That put him at odds with former hawk Michael Saunders, who said in a speech last month that the BOE may need to cut rates even if the U.K. avoids a no-deal exit, and stressed that the uncertainty shouldn’t be a “recipe for policy inertia.”

Vlieghe’s speech mainly focused on how monetary policy has developed since the financial crisis. He said it was “appropriate” for him “to warn of the risks that it may be more difficult to fulfill our mandate in the future with the current neutral rate and inflation target if we are hit by a recession similar to those in the past.”

“We are not at the point where monetary policy has run out of ammunition, but the risk of that happening in the future has clearly risen relative to the pre-crisis period,” he added.

He also discussed the debate over raising central banks’ inflation targets, which he said was a debate worth having, albeit not in the MPC.

He touched on the potential for helicopter money, or direct cash handouts, which he said could stoke runaway prices as easily as it could trigger stronger growth. It would suspend both the use of interest rates as a tool and the inflation target.

“Before we, as a country, give up central bank operational independence, I would suggest that, unless we find ourselves in a truly severe deflationary crisis, we try some less radical options first,” he said.

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