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In its quarterly health check on the economy, Threadneedle Street’s governor, Mark Carney, said he still expected London and Brussels to come to an agreement. However, he added that it should not be assumed that the Bank’s monetary policy committee would respond to a chaotic Brexit by repeating the cut in interest rates it delivered after the EU referendum in 2016.
Carney said that the MPC would assess the impact of a no-deal Brexit on the demand for goods and services, the supply-side potential of the economy and the value of the pound before deciding on its response. Only if the shock to demand were greater than that to supply would it cut rates.
“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” the governor said.
A threat to increase interest rates by the MPC will add pressure on the European Research Group of Tory MPs, who currently prefer adopting World Trade Organization trade tariffs to accepting Theresa May’s Chequers deal. [...]
Announcing the latest decision of its rate-setting committee on Thursday, the Bank said the MPC voted unanimously to keep the base rate at 0.75%. On the assumption that there is a smooth Brexit, the MPC thinks it will need to raise rates gradually from their current level of 0.75% in order to keep inflation close to its 2% target. Threadneedle Street believes businesses will unlock investment that has been put on hold while there has been uncertainty about the future UK-EU relationship, pushing growth up from 1.5% in 2018 to 1.7% in each of the next two years.
Apart from Brexit, the MPC expressed concern that the slowdown in the global economy and the impact of the US-China trade dispute would have an impact on the UK. The inflation report cited weaker GDP growth across the eurozone and in China over recent months. Several large developing world countries have also seen their growth rates tumble, leaving the US as one of the main pillars keeping global rates from falling below their recent average. [...]