Brexit fog befuddles Bank of England on rate hike

When they meet this week, UK monetary policymakers must weigh higher inflation, unimpressive growth — and stalled EU negotiations.

کد خبر: ۷۴۳۳۳۵

تاریخ: ۱۰ آبان ۱۳۹۶ - ۰۸:۲۲

Brexit jitters are complicating the Bank of England’s best-laid plans to change monetary course.

Britain’s central bank has strongly signaled its intention to hike rates in November for the first time in a decade. After all, rising inflation and interest rates at rock bottom would normally call for a tightening.

Except these aren’t normal times in Britain. The lack of clarity over how Brexit will play out adds to concerns about lackluster growth and stagnant wages. To many observers, now is no time for the BoE to tighten the reins.

"The bank has painted itself into a corner,” said Peter Dixon, chief U.K. economist at Commerzbank. "I’m not convinced of the reasons for a rate hike, but I’m rather forced to concede that November is looking like the most likely option.”

The bank finds itself in a difficult position. Raising rates may rattle business and consumer confidence even further. Not raising them would hit its credibility with the markets. And the swirling speculation about what it might do isn’t good either.

"There’s a lot of uncertainty over the political situation and Brexit, and the last thing the economy needs is more uncertainty about what is happening in monetary policy,” said Suren Thiru, head of economics at the British Chambers of Commerce (BCC).

According to the minutes of its last meeting in September, a "majority” of the members of the BoE’s monetary policy committee agreed that removing stimulus would be appropriate "over the coming months,” telling the market that it should get in gear for tightening.

Governor Mark Carney, too, is under pressure. Once likened to an "unreliable boyfriend” by Labour’s Pat McFadden for the way he signaled the timing of rate rises, Carney can ill-afford to backtrack. The governor, who last year announced his intention to step down in 2019, has faced consistent criticism from Brexiteers for talking down the economy and was last week described by Conservative MP Jacob Rees-Mogg as an "enemy of Brexit.”

Since the bank’s last meeting, however, the EU’s remaining 27 countries said there wasn’t "sufficient progress” in the Brexit talks to move to the next phase of talks on a future economic relationship with the EU, prolonging the uncertainty for British business. A deal may not emerge for months, if it does. Some 30 percent of economists polled by Reuters last week said Britain would be forced to leave without a deal.

Britain’s troubles with Brussels come on top of the almost daily infighting within Theresa May’s weak Conservative government, and against the backdrop of a worrying economic picture.

Though many of the headline economic numbers aren’t horrible — the first estimate of growth for July-September showed expansion by 0.4 percent, slightly better than the 0.3 percent growth in the second quarter of 2017 — it’s confidence and investment that are suffering.

For the first time in a year, optimism about business conditions fell in the Confederation of British Industry’s quarterly industry trends surveypublished on October 23. Businesses are becoming more hesitant to invest. Despite a weak sterling, exports aren’t looking up: The number of manufacturing firms saying they have a positive outlook about exports over the next year fell — only 7 percent were positive, compared to 13 percent in July and 30 percent in April.

In the services sector — which accounts for three-quarters of the U.K. economy — domestic sales and orders, expectations about whether a firm will hire in the future, and investment are all stagnant and below pre-referendum levels, according to the BCC’s quarterly survey of 7,100 businesses, published on October 13.

Household consumption grew by 0.2 percent in the second quarter compared to the first, but any growth will be weighed down by the continued drag on wages.

Despite record low unemployment levels at 4.3 percent, real weekly average earnings fell by 0.4 percent, excluding bonuses, in June to August, compared to a year earlier. The BoE pointed out in its last Inflation Reportthat companies may hold off on raising wages until they’re more sure of future profits, while employees may be too scared to ask for wage rises, or switch jobs, due to the political and economic uncertainty.

In September, a BoE summary of business conditions said that "uncertainties regarding the U.K.’s future trading arrangements [with the EU] continued to deter investment for some firms,” with many looking to invest in the EU in order to be able to do business there, even if a trade deal isn’t struck with Brussels.

The financial services sector is leading that charge. "Every time there is an explosion of political rancor or disagreement, it does make companies doubt whether or not there will be a deal at all,” said Miles Celic, CEO of TheCityUK, an industry lobby group, in testimony to the U.K. parliament’s EU select committee on October 24. He added that banks aren’t going to wait long for the U.K. and EU to get a deal before they act on contingency plans and move business out of Britain.

As calls grow for the BoE to hold fire, some members of the monetary policy committee have come out in agreement.

In testimony to the treasury committee on October 17, David Ramsden made it clear he was against a rate hike, while Silvana Tenreyro strongly caveated her September support of an imminent rate rise, saying she needed to see the data first. Then, in several interviews over the past weeks, Deputy Governor Jon Cunliffe said it isn’t clear rates need to be hiked soon.

These more recent mixed signals open the BoE to another kind of criticism. "It would be much more helpful if the BoE spoke with one voice and were more clear on the path of interest rates,” said the BCC’s Thiru.