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Bank of England's Hard Choice in a Post-Brexit World

Mark Carney, governor of the Bank of England.
ENLARGE

Mark Carney, governor of the Bank of England.


Photo:

Luke MacGregor/Bloomberg News

By

Richard Barley

July 14, 2016 8:59 a.m. ET

It is all change at 10 Downing Street, but still no change in Threadneedle Street.

The Bank of England kept rates at 0.5% Thursday, a level it has maintained for more than seven years. But action is highly likely to emerge in August as the impact of Brexit becomes clearer.

Indeed, only one member of the nine-strong Monetary Policy Committee, Gertjan Vlieghe, voted for a 0.25-percentage-point reduction. That was a surprise, even for those who had forecast the BOE would hold steady, since more support for looser policy had been expected. Markets were clearly wrong-footed by the decision, having expected Governor Mark Carney to deliver a swift rate cut. The FTSE 100 index dropped over 1% after the news emerged, sterling shot higher against the dollar and gilt yields rose.

The BOE took note of signs the U.K. economy was already slowing, but decided to wait until more detailed data were available on the situation. Still, the BOE said it was ready to take “whatever action was needed”; the minutes of the meeting show “most members” of the MPC expect policy to be loosened in August. Policy makers noted they were considering a range of stimulus measures and policy combinations, but offered no details.

To be fair, the challenge for the BOE is complex. Monetary policy is helpful in dealing with diffuse, generalized shocks to an economy. By easing policy, central bankers can reduce pessimism about the future and generate confidence. But Brexit is a highly focused shock, and produces a specific uncertainty over the U.K.’s economic and political relationship with the rest of Europe that is not obviously amenable to being addressed by lower interest rates or more private-sector credit creation.

One source of uncertainty, too, has been reduced in the U.K. by the installation of Theresa May as prime minister and the swift formation of a new government. A long summer of political campaigning that might have generated more turmoil has been avoided. But the U.K. is only at the very start of the road in negotiating a new relationship with the European Union.

Ultimately it is political answers that will really matter for the U.K. Mr. Carney and the BOE can try to smooth the path, but can’t solve the problems faced by Ms. May and her government.

Write to Richard Barley at [email protected]

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Bank of England's Hard Choice in a Post-Brexit World Reviewed by on . ENLARGE Mark Carney, governor of the Bank of England. Photo: Luke MacGregor/Bloomberg News By Richard Barley Richard Barley The Wall Street Journal CANCEL Biogr ENLARGE Mark Carney, governor of the Bank of England. Photo: Luke MacGregor/Bloomberg News By Richard Barley Richard Barley The Wall Street Journal CANCEL Biogr Rating:
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