There can rarely have been a more complicated time to set interest rates for the U.K. economy.
While high inflation, low unemployment and stable growth would usually prompt the Bank of England to raise interest rates again soon, concerns over Brexit are likely to stay the hand of its Monetary Policy Committee, whose decision is due tomorrow.
“Uncertainty over how Brexit talks will pan out means that the MPC won’t want to make a strong commitment regarding the timing of the next rate hike,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics.
With the next stage in the Brexit discussions with the European Union due to start soon, there’s a sense of confusion over what Britain’s exit from the bloc in a little over a year’s time will entail. Chief among the concerns is the terms of a transition period that Britain wants in place after it is due to leave in March 2019 in order to smooth out its exit and give it time to adjust to a new economic relationship with the EU.
Bank of England Governor Mark Carney has said that the outlines of the transition deal should be agreed upon by the end of this quarter so that firms across sectors — particularly in the crucial financial services industry — can start planning. Doing so, he has said, will limit the risks of a shock on Brexit day: “The sooner the better.”
Despite a lack of clarity over Britain’s economic outlook after March 2019 and whether firms will continue to have access to the European tariff-less single market, the British economy proved last year to be more resilient than many had forecast. That has emboldened many Brexit backers to discredit warnings about the future. The Bank of England itself was one of the more high-profile forecasters to get it badly wrong in the run-up to the Brexit referendum in June 2016, warning that a vote in favor of Brexit could lead to recession.
There’s been no recession — not even close — partly because the fall in the pound helped boost exports, particularly to the 19-country eurozone, which is currently in the midst of its strongest upturn in a decade.
In the final three months of 2017, the British economy grew by a quarterly rate of 0.5 percent, a better than expected outturn that means it expanded by 1.8 percent overall last year. While slower than the neighboring eurozone or the U.S., it’s still a healthy pace.
As a result, many in financial markets are predicting the Bank of England will raise rates again as soon as May, especially if an agreement on a Brexit transition period is secured.
Last November, the Bank of England hiked its main interest rate by a quarter percentage point to 0.5 percent, its first increase in a decade, to bring inflation down. It hinted of more to come. Price increases became more acute after the Brexit vote as the plunge in the value of the pound raised import costs, notably of energy and food. Inflation hit an annual rate of 3.1 percent in November, from around 0.5 percent at the time of the Brexit vote.
Though above-target inflation is likely to remain a key feature during this week’s interest rate deliberations, it’s not expected to result in another hike. Carney will likely buy time by stating that the recent firming of the pound to over USD1.40 as well as the softening in the housing market will help the bank get inflation back toward its target rate of 2 percent.
The biggest complication for rate-setters is Brexit-related. With the minority governing Conservative Party divided between those who want a clear split with the EU that will allow the country to carve out trade deals around the world, and those advocating only modest changes in the relationship with Britain’s biggest trading partner, uncertainty is flaring up once again.
Earlier this week, a closely watched survey of business activity in the manufacturing, construction and services sectors fell to its lowest level since August 2016, the immediate aftermath of the Brexit vote.
“Brexit continues to be mentioned as a source of uncertainty, and that’s likely to persist over coming months until there is greater clarity on the future trading relationship,” said James Smith, developed markets economist at ING.
Should some certainty re-emerge by the springtime, in the form of a Brexit transition deal, the case for a rate hike would grow.
But the current infighting in the British government suggests we’re nowhere near there yet. Pan Pylas, London, AP
EU says May must make its mind up on future trade relations
The European Union’s Brexit negotiator warned that the time has come for the U.K. to clarify what relationship it wants with the bloc once it leaves, and warned that exiting its customs union would hurt trade.
Michel Barnier shook his head as he outlined the results of a meeting with the U.K. Brexit chief David Davis. With Britain set for departure on March 29, 2019, Barnier said it was time for Britain to decide whether it wants.
“The only thing I can say, without a customs union and outside the single market, barriers to trade on goods and services are unavoidable.” Barnier said. “The time has come to make a choice.”
Davis, by contrast, said tried to assert the British position was clear: The U.K. wanted a comprehensive free trade agreement while still having the opportunity to make deals across the rest of the world.
“It’s perfectly clear what we want to do. There’s no doubt about it, we are leaving the customs union but we are aiming for a good future for Britain.”
The comments come after weeks of political infighting within Prime Minister Theresa May’s Conservative Party.
With only months before Britain is to leave, May’s party has been split between those who want a complete break from the EU and those who want to keep Britain’s economy closely aligned with the bloc and its market of 500 million people.
Business leaders have been pleading with May to have close alignment with the EU. Lawmaker Anna Soubry urged May to pay attention, taking to Twitter to urge her to reject the so-called “Hard Brexit” vision espoused by the European Research Group lawmakers, led by Jacob-Rees Mogg, a prominent Brexiteer.
“It’s deeply unattractive that the only reason they want to leave #CustomsUnion is to chase unicorn trade deals,” she tweeted.
The government position was important because being part of the customs union affects how members trade with countries outside it.
Political leaders who pushed for Britain’s exit pledged to strike new trade deals with the United States and others. Such deals wouldn’t be possible while remaining in a customs union because the EU executive negotiates trade deals on behalf of members of the bloc. AP