“[A] plan beats no plan,” said the Bank of England governor, Mark Carney, which was presumably a dig at the squabbling political class. And here’s the first part of his plan: interest rates will probably be cut in the summer. It is a sensible move.
As even the most blinkered members of the leave camp should be able to see, a short-term hit to UK economic growth is likely. So best to get your retaliation in early, or at least signal your intentions, to help absorb the initial shock of Brexit.
The Bank could have waited until sterling, down 10% against the dollar since the referendum last Thursday, had settled at a new level, which will be a matter of weeks, rather than days. A delay would have the advantage of allowing the Bank to fine tune its post-Brexit estimates of UK growth and inflation, and thus provide the hard evidence for easing monetary policy.
But why wait for precision? It is obvious that growth forecasts will be lower and inflation projections will be higher. It could hardly be otherwise after sterling’s decline. But the clear priority is to stimulate the economy, and encourage confidence among businesses and consumers. Inflation risks are next year’s problem.
If the Bank’s first response was straightforward, life will get harder thereafter. Should the economy slump, or inflation soar, Threadneedle Street will face “a tradeoff between stabilising inflation on the one hand, and avoiding undue volatility in output and employment on the other,” said Carney. Yes, that tradeoff is where policy setting dangers lurk.
The important part of Carney’s speech was the ending. “One uncomfortable truth is that there are limits to what the Bank of England can do,” he said.
With the Bank rate already at 0.5%, it’s almost a statement of the obvious. Adventures into the murky world of negative interest rates could be dangerous – they might “perversely reduce credit availability or even increase its overall price” – and quantitative easing looks increasingly pointless if 10-year gilt yields are below 1%. It’s up to the politicians to get their act together, as Carney obviously did not put it.
Brexiter Leadsom owes Bank’s governor an apology
Carney defused questions about his relationship with the Conservative Brexiters who attacked him personally during the referendum campaign. Very wise. But it is now time for some of those politicians to apologise. Andrea Leadsom, as one of the candidates for the Tory leadership, has most to answer for.
Leadsom had accused the governor of overstepping his remit when he said the UK’s exit from the EU could lead to a recession, and accused him of promoting financial instability. It was an “incredibly dangerous intervention,” she claimed.
Leadsom was talking guff. Carney could hardly pretend that the referendum wasn’t happening. He was always scrupulously careful to stay well within the Bank’s remit of assessing the potential impact on monetary and financial stability. He explained his thinking when cross-examined twice by the Treasury select committee. He did his job.
If Leadsom wants to be considered seriously as a future chancellor, which one assumes is her real goal, the first act of her leadership campaign should be a public apology. In its absence, she is unfit for No 11.
Political chaos grounds airport expansion decision
Governments have been dithering over Heathrow and runways in the south-east of England for decades, so a further official delay of a few months makes little difference, even if it brought forth the usual bleats from the business lobby about a “missed opportunity”.
What did the business leaders expect? David Cameron had tied himself in knots with his famous “no ifs, no buts” pledge to oppose a third runway at Heathrow. On the final lap of his premiership, it was a simple matter to leave the toxic issue to his successor.
In theory, one obstacle – Boris Johnson’s political credibility – has just been helpfully removed for Heathrow. But Theresa May, who represents the nearby constituency of Maidenhead, is also an opponent, at least officially. Is her opposition zealous or of the high-hurdle-to-expansion variety? It’s hard to tell.
Michael Gove’s constituency of Surrey Heath is just as close as May’s to Heathrow, but it is not on as many flight paths. The airport may draw hope from all those fired-up Gove speeches about the UK broadening its trading horizons and looking beyond Europe.
The bet here, however, is that the latest delay will be followed by another. Cameron’s administration could not face the political fallout even when it had the cover of a report from the Airports Commission. A new prime minister may wish to consider the cases for Heathrow and Gatwick again – slowly. It is always the easiest policy.
Capital gains from Singaporean bank’s caution
Here’s one quick win from Brexit: Singapore’s third-largest bank has stopped lending to punters who want to buy homes in London for investment purposes. United Overseas Bank said it wants to protect its customers from “potential foreign exchange and sovereign risks”. Protect them as long as you wish. Less property speculation from abroad sounds like excellent news for Londoners.
