Broadbent Sees ‘Insidious’ Brexit Hit to U.K. Investmentby and
Says effect may be subtle rather than ‘headline grabbing’
BOE deputy governor defends central banks’ quantitative easing
Bank of England Deputy Governor Ben Broadbent said the effect of uncertainty on business investment after the U.K.’s decision to leave the European Union may be more subtle than some observers have suggested.
The lack of clarity around Brexit could see companies delay major spending decisions as they choose to keep their options open, Broadbent said in London on Wednesday. His comments come amid speculation that the BOE might raise its growth estimates when it announces its policy decision next month, after the economy performed better than many forecast in the wake of the Brexit vote.
“A lack of clarity about the U.K.’s future trading relationships needn’t result in visible, headline-grabbing closures of productive capacity,” he said. “The effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed.”
Broadbent conceded that the economy has proven more robust than expected since the Monetary Policy Committee said in August that growth would slow to 0.8 percent next year. He said that may be due to stronger underlying momentum in domestic demand and resilience in the housing market, as well as support from the rapid depreciation of the pound.
Nevertheless, he defended the central bank’s decision to lower its outlook and boost stimulus, arguing that observers risk over-interpreting “noisy” economic data. The BOE cut interest rates for the first time in seven years and unveiled purchases of government and corporate bonds, which initially help push gilt yields to record lows.
Recent comments from officials of the nine-member MPC are beginning to show the nuances in their outlooks. While Michael Saunders and Kristin Forbes have said that economic growth may be stronger than the central bank has forecast, Minouche Shafik has said forward-looking indicators such as investment intentions remain a cause for concern.
Still, the backdrop, including solid industry surveys published this week, is prompting traders increasingly to bet the BOE will refrain from another rate cut this year. That’s despite the central bank having said most members of the MPC expect to act again. Broadbent said he has yet to decide how he will vote next month.
Policy makers could also rethink their quantitative easing target depending on how the data develops, although Broadbent would feel “some reluctance” to do so, he said.
The weakness of the pound could potentially play a role in policy setting, Broadbent said. While the almost 15 percent drop against the dollar since the Brexit vote has been “relatively orderly,” if it were to gain momentum, the impact on inflation and growth could “in principal” lead the MPC to tighten policy.
The deputy governor addressed the impact of central banks’ QE policies on pension funds. While the BOE is mindful of the impact of fund deficits on firms, he said it’s wrong to simply blame monetary action for larger shortfalls.
“An independent easing in policy -- that part of it unrelated to declines in the neutral interest rate -- tends to push up all prices of all assets, risky as well as risk-free,” he said. “If the MPC and other monetary authorities hadn’t eased policy -- if they had failed to accommodate the forces pushing down on the neutral real rate -- the performance of the economy and equity markets, and the long-term prospects for pension funds, would probably have been worse.”