BOE Officials Signal U.K. Slowdown May Not Be All Brexit Related

  • European Union referendum poses challenge to policy makers
  • Vlieghe, Forbes comment on U.K. outlook, EU referendum

Two Bank of England officials said the U.K.’s economic slowdown may not all be related to the referendum on European Union membership, signaling they have open minds about how temporary the loss of momentum will be.

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Kristin Forbes told the Belfast Telegraph that the Monetary Policy Committee doesn’t have solid proof the cooling is all being caused by the June 23 vote, while Gertjan Vlieghe said in a speech late Thursday that the economy may require more stimulus even in the event of a vote to remain.

“We don’t have concrete evidence that some of the softening we are seeing now is all referendum-related and uncertainty related, and there is a chance other things are going on,” Forbes said in the interview published on Friday. “There is a fog over the data. Some of the data is quite solid, and some of the data has been a bit softer. We aren’t quite sure why.”

The interventions were made against a backdrop of slowing growth, with a gauge of services, the biggest part of the economy, falling to its lowest in more than three years in April. Last week, the central bank issued its strongest warning yet that a vote to leave would harm the economy and Governor Mark Carney said it could even spark a recession.

Evidence Needed

“Following a vote to remain, I would like to see convincing evidence of an improvement in the economic outlook,” Vlieghe said at the London Business School on Thursday. “If such improvement is not apparent soon, this will reduce my confidence that inflation is likely to return to the target within an acceptable time horizon without additional monetary stimulus.”

He said that both interest-rate cuts and quantitative easing “should be on the table” if additional stimulus is needed, though so-called helicopter money isn’t consistent with the central bank’s mandate.

While Vlieghe has already indicated a bias for loose policy, BOE officials are seen as effectively on hold until the referendum has passed. Polls show a so-called Brexit is less likely, and both Vlieghe and Forbes said they are unsure how much of the slowdown can be attributed to the vote.

“Uncertainty ahead of such a major event is bound to lead some firms and households to postpone important spending decisions,” Vlieghe said. “Should the vote be to remain in the EU, I would expect to see an improvement in growth as the delayed spending is actually carried out.”

New Challenges

He added that a vote to leave the bloc would throw up an “entirely different set of policy challenges.” That would include lower growth and higher inflation as a weaker pound pushes up import prices.

In his speech, he highlighted a gradual loss of growth momentum and a lack of inflation and wage pressure. While a downward move in the market path of interest rates has helped offset this, “cumulatively, it adds up to a significant downward revision in growth and inflation, to which monetary policy has not responded so far,” he said.

Vlieghe also looked at low long-term interest rates and concluded that the biggest factor behind the fall since the financial crisis had been a downward revision in the expected path of borrowing costs and relatively stable inflation expectations.

This suggests that “the reason expected future real rates are low is that monetary policy has responded, and is expected to continue to respond, appropriately to persistent forces weighing on demand and inflation,” he said.

It also indicates central bank asset purchases known as quantitative easing have not distorted government bond yields, he said.

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