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Europe, Forex

No-deal Brexit might mean near-zero rates – BoE’s Vlieghe

By William Schomberg and David Milliken

LONDON, July 12 (Reuters) – The Bank of England might need to cut interest rates almost all the way down to zero in the event of a no-deal Brexit and it is not clear how long it would take for them to rise again, senior BoE official Gertjan Vlieghe said.

Vlieghe’s comments, in a speech at Thomson Reuters in London, went further than those of other BoE policymakers who have said rates would probably need to be cut after a no-deal Brexit shock to the economy, but have not been explicit about the size of such a move.

The prospect of Britain leaving the European Union without a deal has grown after both candidates to become Britain’s next prime minister said they would be prepared to lead the country into a no-deal Brexit if necessary.

Vlieghe dedicated most of his speech to arguing that the BoE should make a major change to its forecasting process and follow other central banks by setting out its best collective guess about how borrowing costs might change.

Currently the BoE bases its forecasts on interest rate futures in financial markets, which Vlieghe said made it unnecessarily complex for the central bank to get its message across to companies, investors and consumers.

He sought to lead by example by spelling out what he thought the BoE should do with its benchmark rate – which currently stands at 0.75% – if Britain leaves the European Union without a deal to cushion the change.

“On balance I think it is more likely that I would move to cut Bank Rate towards the effective lower bound of close to 0% in the event of a no-deal scenario,” Vlieghe, one of nine interest-rate setters at the British central bank, said.

“It is highly uncertain when I would want to reverse these interest rate cuts,” he said, explaining it would depend on the economy recovering from its no-deal shock or a rise in inflation risks caused by a slump in the value of the pound.

On the other hand, if Britain can ease its way out of the EU with a deal, the BoE could raise rates to 1.0% in one year, 1.25% in two years and 1.75% in three years’ time, he said.

However, such increases would probably also depend on the global economy recovering from its slowdown.

Under a third scenario – another Brexit delay beyond the current Oct. 31 deadline – the outlook for rates “is likely to lie somewhere between the two paths that I have outlined already,” Vlieghe said.

The BoE’s long-standing core message that it plans to raise rates gradually, assuming Britain avoids a no-deal Brexit, has been increasingly at odds with the view of many investors.

They have ramped up their bets on the central bank’s next move being a rate cut.

That tension has grown recently due to increased concerns about a no-deal Brexit, as well as a slowdown in the global economy, which has prompted other major central banks such as the Federal Reserve and the European Central Bank to signal that they are ready to pump more stimulus into their economies.

BoE Governor Mark Carney warned last week that Britain was facing higher risks from Brexit and increased protectionism, prompting investors to put a 50-50 chance of a BoE rate cut before Carney’s term ends in just over six months’ time.

In his speech, Vlieghe noted the global headwinds for Britain and said Britain’s jobs market – long a bright spot – also appeared to be slowing, with a small fall in the number of vacancies and a slight slowdown in wage growth.

But he warned against reading too much into Britain’s weak second-quarter growth rate which could be close to zero “or even slightly negative” due to swings in car production and inventory build-ups around the original Brexit deadline in March.

“It is entirely possible that we see data volatility again around the perceived no-deal risk at the end of October,” he said. (Writing by William Schomberg, editing by Andy Bruce)


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