By now, had things turned out differently, Theresa May would have secured the passage of her Brexit withdrawal bill through parliament and the UK would unquestionably be on course to leave the EU at the end of March.
In those circumstances, the Bank of England would be taking a very different view of the prospects for the economy and a much more hawkish view about interest rates. There would have been a good chance that at the December meeting of the Bank’s monetary policy committee, at least one member would have voted for an immediate tightening of policy.
The fact that May is still struggling to get enough MPs to sign up to her deal and that businesses are being forced to plan for the possibility of a no-deal Brexit meant it was inevitable that the MPC would leave borrowing costs unchanged this month.
Forward-looking business surveys show Brexit uncertainty has increased since the Bank’s last quarterly inflation report in November. Investment has been mothballed and there are signs – notwithstanding upbeat official data for the high street in November – that retail spending is cooling. In those circumstances, rate rises are clearly off the agenda.
But if one message from the MPC was that the short-term risks to the economy have increased, a second was that it won’t delay long in raising rates should those risks fail to materialise.
Minutes of the MPC meeting note that domestic inflationary pressures have been building. Even though the economy has slowed, the Bank says wage growth at 3.25% is higher than it anticipated in November.
By the time of its February meeting, the Bank will know whether Brexit will be smooth or not. If it is, the short-term result will be higher investment, higher employment, higher wages and higher interest rates.
