ADVERTISEMENT

U.K. Will Need Hikes If Brexit Goes Smoothly, BOE’s Ramsden Says

U.K. Will Need Hikes If Brexit Goes Smoothly, BOE’s Ramsden Says

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

The U.K. will need interest-rate increases if Brexit goes ahead smoothly, according to Bank of England Deputy Governor Dave Ramsden.

“If we get a smooth Brexit with a transition deal, as assumed in the MPC’s latest Inflation Report forecast, I expect growth to pick up, leading to excess demand and building domestic inflationary pressure, so that further monetary tightening is appropriate to maintain monetary stability,” Ramsden said in a speech in Inverness, Scotland.

Ramsden’s comments echo those of BOE Governor Mark Carney, who spent much of his last press conference making the case for faster rate hikes than money markets imply. Investors still see little chance of a move by the BOE this year, with the political chaos surrounding Brexit not clearing up any time soon.

The U.K. now has until Oct. 31 to exit the bloc. Prime Minister Theresa May has agreed to step down early next month, putting all forms of Brexit back on the table, with some seen as more economically damaging than others.

If the country leaves the EU with no deal, “the response would not be automatic and could go either way: rates could go up or down as the situation demands,” Ramsden said. “There are scenarios where the balance of those factors would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to tighten.”

Ramsden said he is less optimistic than other policy makers about the economy’s growth going forward, since he sees its “speed limit” -- the pace at which it can expand without generating inflation -- as lower due to sluggish productivity.

He is less confident about a possible pickup in productivity than his colleagues because pre-crisis growth in finance sector productivity was “simply unsustainable.” What appeared to be rising output per hour in that industry was profits from risky lending that led to the crisis, he said.

Manufacturing, meanwhile, had more sustainable gains due to competition from abroad, though that sector is a much smaller part of the economy, he said. And looking forward, distancing from trade partners in the EU, as well as that between the U.S. and China, could lead to a tick down in productivity. The slowdown in investment since the Brexit referendum also inhibits it, he said.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Lucy Meakin

©2019 Bloomberg L.P.