Following a no-deal Brexit, the pound would almost certainly fall, pushing up prices
you are driving a car during a torrential downpour. You hit a puddle and start to aquaplane. Some drivers would instinctively slam on the brakes. But some petrolheads claim that the best course of action is to accelerate out of trouble. Make the wrong decision and your car could end up skidding off the road.
The Bank of England may soon face a similar dilemma. In the event that Britain leaves the European Union with nothing agreed, should it raise or lower interest rates? Shortly after the referendum in 2016 the bank cut the base rate of interest and launched a round of quantitative easing . But now it argues that “[t]he monetary-policy response to Brexit, whatever form it takes …could be in either direction.” On September 19th the bank is expected to keep rates at 0.75% for the 14th month running.
However, rate-setters have less room for manoeuvre than they did after the referendum. Back in mid-2016, consumer prices were growing at 0.5% a year. Now the inflation rate is slightly above the bank’s 2% target. Following a no-deal Brexit, sterling would almost certainly fall, further pushing up prices as imports became more expensive. A depreciation of 10% or more in the value of the pound is likely—which, according to a rule of thumb, would increase prices by 2-3%.
There is another reason why bringing out the playbook from 2016 would be tricky. The referendum did not change anything fundamental about the British economy. All laws and regulations in place on June 24th 2016, the day after the vote, were the same as they had been on June 23rd. A no-deal Brexit would be different. Britain’s trading relationship with its biggest market would change overnight.
The bank must balance these competing pressures. In the past it has tolerated above-target inflation for a short while, the better to support economic growth and jobs. Mark Carney, the bank’s governor and chairman of thes on September 4th that “it is more likely that I would vote to ease policy in the event of a no-deal Brexit than not.” But, he added, “It is not assured.” Other members of thesound even more cautious.
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