BOE’s Forbes Urges Calm to Study Data Before Adding Stimulus

Would Added BOE Stimulus Stimulate Economy?
  • MPC member writes in opinion article in The Telegraph
  • Policy makers should ‘keep calm and carry on’: Forbes

Bank of England policy maker Kristin Forbes said there’s no need to hurry to add stimulus after the U.K.’S vote to exit the European Union, citing a moderation of the immediate market turmoil, calm consumers and “quite solid” growth before the referendum.

“Given the substantial uncertainty and likelihood that growth slows, there is a valid case to ease monetary policy to support demand,” Forbes wrote in an opinion article published on The Telegraph’s website late on Wednesday. “But until more hard data is available, I believe this is a good time to ‘keep calm and carry on.’”

The remarks show that opposition to quick action is emerging among some on the Monetary Policy Committee after BOE Governor Mark Carney signaled extra stimulus and minutes of the panel’s meeting last week showed most officials expect easing next month. Forbes’s comments echo similar remarks from fellow MPC member Martin Weale, who said on Monday he needs to see firmer evidence of Brexit’s effect.

Forbes said her view that this is not a “Lehman moment” -- referring to the 2008 financial crisis and ensuing global recession -- underscored the argument for delaying action.

‘Impossible to Know’

Uncertainty may prompt businesses to delay hiring, the U.K.’s potential growth rate will probably fall and firms are likely to find it more difficult to compete in foreign markets, Forbes wrote. On the other hand, much depends on what new trade agreements are negotiated, and exporters could benefit from sterling’s depreciation, she wrote.

“Given the dearth of hard data, it is impossible to know the relative magnitudes of these various effects,” Forbes wrote. “In my view, we can wait to use these tools until we better understand the effects of the referendum, the optimal magnitude of any stimulus, and how best to target these tools to be most effective and minimize the negative side-effects.”

The pound rose 0.4 percent to $1.3259 at 8:03 a.m. London time. Sterling is down more than 10 percent since the EU referendum.

Officials face a trade off between supporting demand and their 2 percent inflation target as a weaker pound boosts price pressures, something extra stimulus could exacerbate, Forbes said. Consumer-price growth may exceed the BOE’s goal in two years even without easing, she said.

Uncertainty after the vote prompted Carney to say he was willing to boost stimulus over the summer, and other officials are more certain about acting preemptively, with policy maker Gertjan Vlieghe and Chief Economist Andy Haldane saying they’ll vote for action at the next meeting. Minutes of the July gathering of the nine-member MPC said “most members of the committee expect monetary policy to be loosened in August.”

Still, the referendum’s impact won’t start showing up in official data until the middle of August, according to the Office for National Statistics, leaving the MPC the dilemma of taking action without a complete picture. Despite that, investors have priced in about a 75 percent probability of an interest-rate cut at the MPC’s Aug. 4 decision.

The economy has already received some stimulus from a drop in market interest rates since the June 23 vote, a weaker pound and the easing of banks’ capital buffers by the BOE, Forbes said. The MPC also has a number of instruments with which to respond, she said, “but our tools are not limitless.”

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