Bank of England's Quest for ‘Normal,’ in the Era of Brexit

The vote to leave the EU hasn't (yet) resulted in catastrophe. When is it safe to raise rates?

Mark Carney is dropping hints.

Photographer: Patrik Stollarz/AFP/Getty Images

Central banks are usually asking how to get to “normal” and stay there. Not too hot, not too cold. The Bank of England must answer a tougher question next month when deciding whether to raise interest rates: Can the U.K. ever be “normal”?

The economy is strong: Unemployment is the lowest in more than four decades, and inflation is well above the bank's 2 percent target. Central bankers would normally have raised interest rates under those circumstances. But there’s Brexit.

Last year Britons unexpectedly voted to break away from the European Union. In the aftermath of that shock, the Bank of England cut rates as a sort of preventive measure -- one that in retrospect looks like it wasn't needed. Governor Mark Carney addressed this issue last month in what was seen as a pretty big hint that the time had come to start removing some of the insurance.

Referring to the bank’s Monetary Policy Committee, Carney told the European Central Bank's Sintra forum: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

The temperature had been building for a while, though the governor had yet to lend the authority of his office to the case. At the preceding meeting of policy makers, three committee members dissented in favor of a hike. One of that trio, Kristin Forbes, subsequently left the bank when her term ended.

Normally, the head of a central bank weighing in would seal it and almost everyone would fall into line, especially the most senior officials. But the Bank of England tends to be more democratic. Carney's predecessor, Mervyn King, was outvoted on several occasions and seemed fairly relaxed about it.

Skeptics might point out that Carney didn't specifically say he was referring to the Aug. 3 meeting. And his actions have in the past been likened to those of an “unreliable boyfriend” for sending mixed signals. 

That's the context in which Deputy Governor Ben Broadbent's comments landed this week. He told the Press and Journal, a Scottish regional newspaper, that it's “a bit tricky at the moment.”

Inflation is now 2.9 percent, at least part of which is attributable to the pound's decline since the referendum. But it’s not just a matter of currency: Wages aren't exactly jumping.

The economy kept expanding after the Brexit vote, though retail sales fell in May for the second time in three months.

Brexit hasn't proven -- yet -- to be an economic catastrophe, despite some of the rhetoric around the time of the vote.

It's also true that -- even if Carney is hinting at a hike on Aug. 3, and even if his preference carries the day -- we aren't necessarily talking about a cycle of rate increases in Britain. Maybe just a start, a kind of down payment.

It might be worth considering a lesson from the Bank of Canada, which Carney once led. Its governor, Stephen Poloz, and his top deputy, Carolyn Wilkins, clearly signaled an increase and then executed this week without fuss. Officials were on message all the way.

Canada did it. The U.K. can aspire to be normal too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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