Tue, Jul 19, 2016 - Page 10 News List

BOE’s Vlieghe says post-Brexit UK needs stimulus

LONG COMING:The lone dissenter said he had been considering the need for stimulus measures even before the Brexit vote as the economy had been sluggish

Bloomberg

People sit on benches in front of the Bank of England in London on Thursday.

Photo: AFP

Gertjan Vlieghe, who was alone in voting for an interest-rate cut at the latest Bank of England (BOE) meeting, said the UK needs a range of stimulus to combat the impact of its decision to quit the EU.

“The precise implications for the economy are uncertain, although the general direction of travel is likely to be lower growth and higher inflation for a period, as a result of weaker demand, weaker supply and a lower exchange rate,” Vlieghe wrote in an opinion piece published on the Financial Times Web site late on Sunday. “Early indications from business and consumer surveys, as well as the findings of the BOE’s own agents, support that assessment.”

While policymakers last week voted eight to one at their meeting to keep the key rate at a record low, minutes showed most of them expect monetary policy to be loosened at their Aug. 4 gathering, when they are to have new forecasts.

The decision to hold the rate surprised investors, who had priced in more than an 80 percent chance it would be lowered.

BOE Chief Economist Andy Haldane on Friday said that he will push for stimulus next month.

“I favored an immediate rate cut, to be supplemented by a package of additional measures in August,” Vlieghe wrote in the Financial Times. “What precisely that package should look like will have to be discussed over the course of the next three weeks.”

He said that the BOE’s Monetary Policy Committee can “look through” short-term effects “as long as medium-term inflation credibility is maintained.

However, he added that inflation expectations beyond the next few years have fallen since the referendum from “already low levels.”

So far the central bank has not said what measures will best aid the economy.

Economists at JPMorgan predict a package next month including a 50 basis-point cut in the key rate, taking it to zero, a £75 billion (US$99 billion) increase in quantitative easing and the announcement of some credit-easing measures.

Vlieghe said he had been considering the need for action even before the Brexit decision, since the economy had been “slowing for some time” and he worried that the “economic outlook might still not be quite strong enough to return inflation to its 2 percent target over a reasonable period of time.”

“We have not been providing as much stimulus as you might think, because interest rates are not all that far below this lower neutral level,” he said.

“Debt deleveraging, changing demographics and a widening of the income distribution across the population might be some of the factors behind this low interest-rate environment, and these factors are likely to persist for years.”

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