Old Lady “Not a Nurse to Markets”, Says BoE Economist

The Bank of England (BoE) will not ease interest rates just
to appease the expectations of the market or to reassure consumers and
businesses following the Brexit vote, warned Martin Wheale, an external member of the Monetary Policy
Committee (MPC) at the central bank.
 

In his final
speech as a member of the MPC, Wheale noted that
there is still a high level of uncertainty regarding the
implications of leaving the EU and said at the next MPC meeting he will balance
his views on any overshoot of inflation beyond its target in two to three
years’ time against possible weakness in GDP.

However,
Wheale said that he gives
“little weight” to the argument that the BoE should reduce interest rates in
order to appease the markets, which he claims will be disappointed if there is
no easing in August.

The Old Lady of Threadneedle Street is not a
nurse to markets. People who trade in markets know that the Monetary Policy
Committee sets policy month by month in the way that its members think
appropriate. It does sometimes, as we did in our July meeting, give an
indication of where policy may go in the future. But that is no more than the
best judgement at the time and not in any sense a commitment; the public
understand that,” he said.
 

Wheale
continued: “A second argument to which I give little weight is the argument
that early action is needed to reassure people. In contrast to the experience
of 2008, I do not have any sense that either consumers or businesses are panic-struck
and, as I observed, there have been no material signs of financial panic.”
 

Discussing
the impact of the Brexit vote on the pound, Wheale said that it seems highly
probably that the depreciation in the value of the currency was driven in part
by an expectation of slower economic growth in the UK following its exit from
the EU.
 

But
the large external deficit that Britain runs could be an even more dominant
influence on the exchange rate, he claimed. Estimates for the last quarter of
2015 and the first quarter of 2016 put Britain’s external deficit at about 7%
of GDP, and Wheale said that he was “very doubtful” that Britain would have
found it possible to finance the current account deficit indefinitely at the
GBP exchange rate in place on June 22.

“The
outcome of the referendum may have simply focused people’s minds on this issue.
While the fall of the exchange rate has undone the rise since early 2013, the
effective rate is still, as Chart 1 shows, not at a record low level,” he said.

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Wheale
did note though that when the sterling depreciated post-2008 that net exports
rose “by rather less than the MPC had expected” and therefore he “would not
like to judge the impact of the recent fall on our trading position”.

“Beyond these general effects there is
a specific feature about Brexit which may affect our external position and thus
the exchange rate. As you know financial services are an important British
export. Our surplus on exports of financial services (including insurance) with
the rest of the EU amounted to £18.5 billion or 1% of GDP in 2015. 

“If changes to our relationship with
the remaining EU make exports of financial services less straightforward, or
result in some operations moving to the euro area, then there may be a further
specific effect tending to increase the balance of payments deficit and,
presumably needing to be offset by an adjustment of the real exchange rate,” he
concluded.

 

Galen Stops

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