The Bank of England cannot be expected to delay interest rate hikes in light of Brexit, a deputy governor has warned.
Ben Broadbent – a member of the interest rate-setting Monetary Policy Committee (MPC) and deputy governor of monetary policy – says that markets have put too much weight on Britain’s divorce from the EU when it comes to considering whether an interest rate rise is appropriate.
“There’s been a persistent strain of opinion that EU withdrawal is something that necessarily means lower interest rates, or at least that it’s a reason to avoid putting them up,” he said in a speech prepared for the London School of Economics.
“If so, then I think the belief has been overdone.”
Mr Broadbent was among the seven MPC members who voted to increase interest rates from to 0.5% this month, reversing a cut to 0.25% in the wake of the Brexit vote and marking the Bank’s first hike in a decade.
Only two members voted to keep interest rates at record lows.
The deputy governor has since said he anticipates a “couple” of further hikes as part of measures to get inflation, which is currently at 3%, back on track and closer towards the Bank’s 2% target.
The Bank of England’s Monetary Policy Committee earlier this month voted to cut interest rates for the first time in a decade (PA)
However, he stressed that while Brexit was not a reason to delay an increase to interest rates, additional hikes are not inevitable.
“It’s not that the opposite is true. I’m certainly not going to argue here that interest rates will inevitably rise as Brexit proceeds. Apart from anything else, it isn’t the only show in town.”
Mr Broadbent said it was important to recognise that economic shocks “come along all the time”, and that even the “marginal impact” of Brexit on what the appropriate level of interest rates should be, is “ambiguous”.
Fellow MPC member Sir Jon Cunliffe gave his own speech on Tuesday, defending his decision to vote against the November rate hike, saying it would be better to wait for signs of rising wage growth before pulling the trigger.
He said the Bank may be blindly relying on economic models which predict that wages will rise in response to lower unemployment, leaving it at risk of overestimating domestic inflationary pressure.
The recent spike in inflation has been primarily linked to the effects of the Brexit-hit pound, which has made imported products more expensive and impacted prices at home.
Sir Jon argued that the lack of evidence around home-grown pressures on prices should allow the Bank to wait longer before raising interest rates, and while the Bank does not have a mandate to adjust for employment levels or wage growth, they provided additional evidence and could better inform MPC decisions on interest rates.
But Mr Broadbent said that the MPC “has little choice” but to take economic data “at face value”.
“To adapt the football manager’s cliche, we can only play the economy that’s in front of us. What’s been in front of us for several months is an economy with above-target inflation and dwindling spare capacity.
“That’s why I think it was the right thing to remove a degree of monetary accommodation.”