ANALYSIS: Bank of England running out of time to create Brexit cushion
Bank of England policy makers have a benchmark interest rate of just 0.5% — leaving limited room to cut should they need to
London — Mark Carney’s window to raise interest rates before Brexit is closing.
As Britain draws nearer to its divorce from the EU at the end of March with little certainty as to the economic repercussions, Bank of England policy makers with a benchmark interest rate of just 0.5% could be left with limited room to cut should they need to act.
There’s not much time to reload the arsenal. After voting 7-2 to leave interest rates unchanged on Thursday, policy makers are left with just seven meetings — and only three inflation reports — before the UK’s official departure date in which they could push rates higher.
Policy makers also acknowledge that interest rates are still low enough to stoke growth and that the economy risks overheating.
Despite Carney’s assurances that "an ongoing, modest tightening" is still on the cards, the monetary policy committee’s decision to wait for momentum to reassert itself, after weak first-quarter data, now leaves economists asking whether the bank will be in a position to help should Brexit go wrong.
‘‘There’s not enough time between now and March 29 2019 to get to a position with the bank rate where they could cut from and generate a meaningful stimulus to deal with an adverse shock," says Daniel Vernazza, an economist at Unicredit in London.
An agreed transition period that lasts until December 2020 could provide more time for the UK to redefine its trading relationship with the EU, potentially smoothing economic shocks and buying time for policy makers to raise rates.
But with negotiations fraught, any agreement may come at the last minute. And it could still fall apart — a point Carney underlined at his press conference on Thursday when he described a deal as "an assumption, as opposed to a guarantee".
In a BBC interview after Thursday’s announcement, Carney was asked about the timing of the next tightening. "It’s likely over the course the next year that interest rates will go up, likely by the end of the year," he said.
Investors trimmed bets on a hike after the Bank of England decision, though they still see a good chance of a move in 2018. For many economists, a 25-basis-point rate increase could happen in August.
"They had a little bit of time on their hands to wait and see if the second-quarter data bounces back," says Victoria Clarke, an economist at Investec in London. "We suspect it probably will so there’s not too much harm done by hanging on until August."
Even those predicting rates will increase this year see a shrinking pool of opportunities. Officials may be less keen to raise rates at their August meeting — when markets are thinner, and when the businesses and households Carney has pledged to prepare could be caught off-guard in the vacation period, says Yael Selfin, chief economist at KPMG in the UK.
"The next rise may now only take place in November," she says. "That would make a relatively long delay in policy action due to a potential short blip in data."