BOE May Have Miscalculated Brexit Vote Effects, Forbes Says

  • Current models could be double-counting impact of uncertainty
  • Says Nov. forecasts may be revised up if positive data persist

Studzinski: Brexit Ultimately a 'Win-Win' for U.K.

The Bank of England may have miscalculated the impact of Brexit-related uncertainty and might need to revise up its economic outlook, according to policy maker Kristin Forbes.

In an interview with Bloomberg News, Forbes -- one of the central bank’s more upbeat officials -- said that while a lack of clarity might curb investment and spending, the impact on growth is unlikely to be as acute as anticipated. She reiterated her view that the economy probably won’t need further stimulus.

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“We may be over-counting the effects” of uncertainty, Forbes said in an interview in her office at the BOE in London on Wednesday. “I’ve worried a bit in our forecast that we control for many of the measures that simultaneously control for uncertainty, and then we put in uncertainty effects, so we’re putting them in twice.”

The pound extended an advance after the comments, and was up 0.6 percent at $1.3105 as of 3:12 p.m. London time.

Initial signs of strength after the decision to quit the European Union have led some economists to question whether policy makers need to change strategy after they unleashed a stimulus package in August and signaled a readiness to ease again if needed. Forbes wanted less of a loosening, voting with the majority to lower the key rate to 0.25 percent but against a new round of government-bond purchases and a plan to buy corporate bonds. 

Brexit Aftermath

Describing the latter as a “potentially powerful tool,” she would have preferred to keep it in reserve in case of a major shock as the U.K. renegotiates its relationship with the EU. Still, since a reversal of current policy would be disruptive, she said she’ll support current stimulus levels, “barring a major, substantial change in the economy.”

In the aftermath of the Brexit vote, housing hasn’t weakened as much as the BOE anticipated and consumption has been stronger, Forbes said. Measures of uncertainty have also come down more than expected since the vote, creating less of a drag.

“An automatic update of what we’ve seen happen suggests that we will be revising the forecast upward,” Forbes said. Still, “we have quite a bit of time, quite a bit of data between here and when we do our November forecast. We’ve got a minimal amount of data, but at least the stuff that has come in suggests that if nothing else changes, there will be some upgrade to the forecast.”

The BOE said in August that the economy will expand by just 0.8 percent next year and 1.8 percent in 2018. Officials have already hinted a more positive view could come when they updated those projections on Nov. 3, upgrading their estimate for this quarter to 0.3 percent from 0.1 percent.

Since joining the BOE in 2014, Forbes has been among the positive cohort of the nine-member Monetary Policy Committee. While she’s never voted for an increase in the key rate, she said was close to doing so before the referendum and was waiting for more evidence of domestic price pressures pushing inflation toward the central bank’s 2 percent target.

While the rate was just 0.6 percent in August, some economists say it could reach 3 percent next year. Should the pound’s 12 percent drop since the referendum correspond with strong domestic demand or a decline in productivity, there could be a sharp pickup in price growth, Forbes said.

The bank will also have to look at cost pressures, Forbes said, and pay may be set to accelerate faster. “Now headline inflation is on track to pick up, that should in and of itself give more power to workers to bargain for higher wages if the labor market remains tight.”

“At this point I don’t see the case for additional stimulus,” she said. “But I am open, I don’t want to close any doors. I’m very much watching the data come in.”

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