Tenreyro Says Smooth Brexit Alone Not Enough for BOE Rate Hikes

(Bloomberg) -- A smooth Brexit outcome won’t be enough by itself to justify higher interest rates, according to Bank of England policy maker Silvana Tenreyro, who said she’d wait to see stronger domestic price pressure.

In such a scenario, a “stronger pound and continued supply growth would both limit the extent that a recovery in demand feeds through into inflationary pressures,” she said.

In a speech Thursday in Glasgow, she also said that a disorderly Brexit is more likely to require the bank to loosen policy rather than to tighten it.

The comments add to the discussion about how the central bank will respond after the U.K. leaves the European Union, which is scheduled to happen at the end of the month. The BOE has said it could move in either direction.

“While I still envisage that in the event of a smooth Brexit we will need a small amount of tightening over the next three years, before voting for any rate rises I would want to be confident that demand was growing faster than supply,” Tenreyro said.

She noted that Brexit uncertainty had taken an increasing toll on the economy, and that some of that will lift if there is a smooth departure. Still, she emphasized that determining the degree of domestically generated inflation would be crucial in gauging the balance between supply and demand.

Tenreyro’s remark that it was more likely that the fallout from a chaotic Brexit would require a loosening of monetary policy than a tightening echos comments made by Gertjan Vlieghe last month. She added it was “easy to envisage other plausible scenarios requiring the opposite response.”

The speech comes amid a flurry of activity from BOE officials after a relatively subdued start to 2019. Late Wednesday, Michael Saunders, considered one of the most hawkish members of the Monetary Policy Committee, said there’s no rush to raise interest rates until the uncertainty of Brexit lifts, while hinting that he differed from some of his colleagues over the right response to a no deal outcome.

Speaking the same day, Jon Cunliffe said that the central bank’s efforts to ensure financial stability in the case of a chaotic Brexit won’t prevent market volatility, while Jonathan Haskel, who joined the bank in September, is due to give his first speech as a MPC member early next week.

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