British policymakers have stated that the Bank of England may need to reduce the interest rates should Brexit uncertainty persist. Michael Saunders also claimed even if the UK avoids a no-deal Brexit, rates may still needed to be cut.
Since August 2018, the interest rates have been on hold at 0.75% since August 2018. Last week, the Bank said Brexit uncertainty indicates that the UK economy was performing below its potential. Mr. Saunders told local businesses in Barnsley, “If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up.”
After his comments were reported, the pound dropped against the dollar, trading down about 0.4% at $1.2277, before paring losses. Mr. Saunder also stated that even without a no-deal Brexit high level of uncertainty surrounding the UK’s departure from the EU would persist and act as a kind of “slow puncture” for the economy.
“In this case, it might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage, especially if global growth remains disappointing,” he said.
“In general, I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track, and accepting that it may be necessary to change course if the outlook changes significantly,” he added.
He said that he still agreed with recent Bank guidance that a limited and gradual increase in interest rates would be needed over the medium-term if Brexit uncertainty reduced significantly and global growth speeds up.
Mr. Saunders repeated during the event of a no-deal Brexit, the Bank’s position that all policy options would be open, depending on the damage to growth and how much inflation spikes from a further fall in sterling.