Brexit Means No Set Direction for BOE Rate, Broadbent Says

(Bloomberg) -- The impact of Brexit on the path of U.K. interest rates is far from certain, and its implications could prompt policy makers to move in either direction, according to the Bank of England’s Ben Broadbent.

The deputy governor, one of the majority of BOE officials to back a rate hike at this month’s meeting, said in a speech Wednesday that the belief that Brexit necessarily means lower borrowing costs has been overdone. That echoes Governor Mark Carney, who said Tuesday that the U.K.’s exit could prompt tighter or looser policy in the future.

“The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more uncertain and more complex,” Broadbent said. “They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.”

BOE officials voted to lift interest rates for the first time in a decade earlier this month as higher inflation eats into living standards. Policy makers also expressed concerns that the degree of spare capacity was dwindling, especially given the economy’s reduced speed limit since the Brexit vote.

Broadbent also said that Brexit could create a “short-term hit” to productivity, despite macro-economics suggesting that changes to supply take time. 

“We saw a sharp step down in productivity growth after the financial crisis. And I think there are things involved in Brexit that, once one digs below the macro-economic surface, could potentially do the same.”

That’s partly because of how resources in the economy are allocated. Trade barriers and tariffs could mean less EU demand for U.K. products, while British firms may have to find domestic substitutes for what they previously imported. According to Broadbent, that wouldn’t matter much if resources could be “seamlessly and costlessly transferred.” But that’s not the case:

“A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees. Someone steeped in one particular area of financial services cannot overnight, or costlessly, be reborn as an expert widget-maker, able to generate the same contribution to GDP.”

Before the terms of the EU withdrawal are clear, Broadbent said the BOE can only “take the economic data at face value.” For him, faster inflation and reduced slack meant the rate hike was justified.

Jon Cunliffe, another deputy governor at the bank, said that he’s also focusing on hard data as Brexit hangs over the outlook. But for him, the lack of evidence of a pickup in wages was enough to justify opposing the rate increase. Even with unemployment at a 42-year low, basic wages are growing at just over 2 percent a year, well below the rate of inflation.

--With assistance from Fergal O'Brien

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net, Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Kevin Costelloe

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