BOE’s Ramsden Says Smooth Brexit Puts Rate Hikes on the Table

(Bloomberg) -- If Boris Johnson secures Parliamentary backing for his Brexit deal with a smooth transition, then interest-rate hikes are on the table for the Bank of England, according to Deputy Governor Dave Ramsden.

Speaking in a Bloomberg interview Thursday -- the BOE’s first remarks after details of the prime minister’s agreement were announced -- Ramsden, 55, said the central bank’s guidance that a smooth exit from the EU would mean “limited and gradual” increases are needed remains valid. That’s despite the damage caused by months of uncertainty and global economic headwinds.

“The kind of guidance we’ve been giving -- in the world of a deal it still applies,” Ramsden said. “We’re not saying over what timeframe, but limited and gradual is a reasonable qualitative framing.”

The pound rose on the comments, paring losses to trade down 0.2% at $1.2871 as of 8:54 a.m. in London.

U.K. 10-year bond yields climbed three basis points to 0.70%, leaving them little changed on the week, while money market investors pared bets on BOE rate cuts, expecting 16 basis points of decreases by December next year, compared with 19 basis points on Thursday.

Ramsden’s view is notably more hawkish than those recently expressed by some of his colleagues, which have focused more on the potential for rate cuts, even in the event of a deal.

A transition agreement and clarity for U.K. businesses will produce “some pickup in investment” which will bolster demand and “hopefully” productivity over time, he observed from his office overlooking the BOE’s courtyard garden. While the labor market is showing signs of slowing employment growth, he sees regular pay gains still pointing to domestic inflationary pressure.

Johnson and European Commission President Jean-Claude Juncker announced Thursday that they’d reached a deal that could pave the way for Britain to finally break 46 years of ties with the world’s largest trading bloc. Johnson still needs to get the agreement through the House of Commons, though, with a vote planned for Saturday as he seeks to deliver Brexit on Oct. 31.

Brexit Scars

Over three years of wrangling have left their mark on the U.K. economy, just when growth around the world is also slowing. Ramsden said he is concerned about the impact of weaker investment on productivity. While he said firms are right to prepare contingency plans in case of a disruptive Brexit, it is hurting output, which “all adds up to me to be quite a weak position on the supply side, which for us then limits the speed limit in which the economy can grow.”

His comments lay bare the differing views among his fellow policy makers. Former hawk Michael Saunders said in a speech last month that the BOE may need to cut rates even if the U.K. avoids a no-deal exit.

In a speech in London Tuesday, Gertjan 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.

What Our Economists Say:

“A stronger currency will ease inflation and support real household income into 2020. But while they no longer need plan for the worst, Johnson’s deal delivers little clarity over what the future trading relationship with the EU will look like. The Bank of England is likely to wait and see in this scenario.”
-- Dan Hanson and Jamie Rush, Bloomberg Economics

Moves in the pound are making the outlook more complex for policy makers, with sterling swinging in a range of more than 3.75% against the dollar this week. It’s “a very unusual time for the U.K. economy.”

During his decade as Treasury observer of Monetary Policy Committee meetings until 2017, “if you had weakness of demand that opened up slack” you’d think “that’s pretty straightforward, we should loosen policy,” he said. But now they’ve also got the “supply side speed limit moving around.” It requires an “interpretation of a wider range of evidence than maybe 12 years ago.”

That is one of the reasons he insists that he remains “genuinely open minded” over what the policy response would be, if there remains a lack of clarity over Britain’s departure from the European Union. “I’m not leaning in one direction in the entrenched uncertainty world,” he said.

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

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

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