EU Vote Is Biggest Source of U.K. Uncertainty, BOE’s Weale Saysby
BOE cut forecasts on Thursday, issued stark Brexit warning
Weale says EU vote has had material impact on sterling
Bank of England policy maker Martin Weale said uncertainty surrounding the U.K.’s referendum on European Union membership will probably have a far bigger impact on investment than consumption.
“The impact of aggregate uncertainty on household consumption is likely to be rather small,” Weale said in a speech Friday at the University of Liverpool. “In contrast, the impact of uncertainty on investment is likely to be material” since ”investment is a much more volatile component of demand than is household consumption.”
Weale’s comments follow BOE policy makers’ latest economic forecasts on Thursday, which saw them lower their growth outlook and keep the benchmark interest rate at a record-low 0.5 percent. Governor Mark Carney said a vote to leave the EU could cause the U.K. to slip into a technical recession, or two quarters of contraction.
Echoing Carney’s view, Weale said the Brexit vote is the “biggest source of uncertainty at the moment.” It’s had a material impact on the pound, which has fallen about 8.5 percent on a trade-weighted basis since its peak in November. The BOE says that half of that decline is due to referendum-related concerns, and that Brexit could mean a further, sharp decline.
Weale said he’s “entirely happy” with the bank’s latest forecasts, though noted a potential inflation issue surrounding the decision to strip out some of the pound’s decline from its forecast, on the basis that it’s related to the EU vote.
“Were we to have over-estimated the degree to which the referendum has weighed on sterling, this would raise the prospect of inflation rising noticeably above target in two years or so,” he said. “This could generate a trade-off between limiting an overshoot to inflation and supporting economic growth.”
Weale is leaving the MPC in August, and will be replaced by Citigroup’s Michael Saunders.