U.K. Chancellor Ready to ‘Reset’ Fiscal Policy on Brexit

Brexit Turbulence May Reset U.K.'s Fiscal Policy
  • Hammond says BOE will use monetary tools in short term
  • New chancellor in China to promote trade, financial services

Chancellor of the Exchequer Philip Hammond said he’s ready to “reset” Britain’s fiscal policy if needed to respond to turbulence caused by the decision to vote to leave the European Union.

“In the short term, our colleagues at the Bank of England will be using the monetary tools at their disposal,” Hammond said in Beijing on Friday ahead of a meeting with fellow Group of 20 finance ministers in Chengdu, China. “Over the medium term, we will have the opportunity with our Autumn Statement, our regular late-year fiscal event, to reset fiscal policy if we deem it necessary to do so.”

Hammond’s comments came prior to publication of flash estimates of the impact of the Brexit vote on U.K. services and manufacturing, with the composite July Purchasing Managers’ Index falling to its lowest in seven years and shrinking at the fastest pace on record. The pound reversed a weekly gain, dropping 1 percent to $1.3102 at 12:35 p.m. London time.

“The PMI data is a measure of sentiment, it’s not a measure of any hard activity in the economy,” Hammond told Sky News in response to the figures. “What it tells us is that people’s confidence, business’s confidence has been dented. They’re not sure. They’re in a period of uncertainty now. Our job is to try to restore certainty, as much certainty as we can, as quickly as we can.”

Lowered Forecasts

The fallout from last month’s Brexit vote is expected to hit tax receipts in the coming months, with growth forecasts for the U.K. economy lowered. Prime Minister Theresa May has said the government has not abandoned its goal of returning the public finances to surplus but is no longer seeking to do so by the end of the decade.

“You need to see fiscal stimulus in the U.K.,” John Hardy, head of foreign-
exchange strategy at Saxo Bank A/S in Hellerup, Denmark, said on Bloomberg
Radio in response to Hammond’s comments and prior to the release of the PMI data. “That’s going to be the key source of getting the U.K. economy going, not Bank of England monetary policy, and certainly not rate cuts which are highly unpopular across the board.”

Hammond’s comments came as he sought to promote business opportunities in the Asian powerhouse in the wake of the vote to quit the EU. Earlier this week, the chancellor ruled out announcing any new fiscal plans until the Autumn Statement and said he was coordinating with the Bank of England on the appropriate response to the referendum result.

The U.K.’s main opposition Labour Party said the PMI data called for an immediate response. “Our country can’t wait for months on end whilst the Chancellor dithers about what to do instead," shadow finance spokesman John McDonnell said in a statement. “We need action now to combat the economic shock of the Tories’ Brexit and their lack of planning.”

Hammond is putting a “strong emphasis on the financial-services sector” during his trip to China, including hosting an event in Beijing attended by firms including HSBC Holdings Plc, Clifford Chance, London Stock Exchange and senior representatives from China’s banking industry, according to a statement from the British Treasury.

“We have built a strong economic relationship with China, and as Chinese investments into the U.K. continue to diversify and as U.K. exports grow, Sino-U.K. relations are more important than ever,” Hammond said.

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