The Bank of England will probably have to take further action if the UK is to avoid a damaging slowdown following the Brexit vote, according to one of its deputy governors.
Minouche Shafik said more monetary stimulus – in the form of an interest rate cut or an increase in the quantitative easing (QE) programme – might be needed to limit the negative impact of Britain’s decision to leave the EU.
Giving a speech in London, Shafik said: “There is no doubt in my mind that the UK is experiencing a sizeable economic shock in the wake of the referendum. It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious.”
The Bank’s monetary policy committee announced a package of measures in August in an attempt to limit the risks posed to the UK economy following the EU referendum on 23 June.
The moves included a cut in interest rates to a new all-time low of 0.25%, and an extension of its QE programme, which involves buying government and corporate bonds from financial institutions in the expectation that banks will then lend the proceeds back into the economy.
The Bank has signalled that it is willing to do more, but Shafik conceded that the evidence so far suggested the Brexit vote had not dealt as severe a blow to the economy as expected.
“The likely timing of [further] stimulus will depend on the continued evolution of the data over the coming weeks and months. Thus far, the welcome improvement in the forward-looking indicators suggests that the slowdown may not be as sharp or as sudden as we might have feared.”
Last week a fellow MPC member, Kristin Forbes, said the British economy’s performance since the vote indicated there was little need to cut rates further. Shafik’s influence over monetary policy will also be limited because she is leaving the Bank in February to head the London School of Economics, having served half of a five-year term.
Shafik added in the speech at an event hosted by the Bloomberg news organisation in London that uncertainty over Britain’s future trade agreements – following a severing of links with Brussels – was reducing companies’ appetite to invest.
“The reality of the protracted process of withdrawing from the EU means we still know very little about the nature of our future trading arrangements, and this uncertainty is weighing on prospects for business investment.
“Our agents around the country report that some new projects are being scaled back or deferred until the outlook becomes clearer. There are signs that foreign companies have become more cautious about investing in the United Kingdom, and we know that some of those who rely on the European Union as a destination for their exports are beginning to make contingency plans in case they have to move some of their business elsewhere.”
