Advertisement

The Bank of England takes small steps back to rational thinking

The Bank of England seems to have accepted that the Brexit vote doesn’t meant the end of the world as we know it, says Merryn Somerset Webb.

160714-bank-b
Mark Carney: no longer making unsubstantiated assumptions about the future

So the Bank of England (BoE) didn't cut rates despite the market giving a cut of 0.25% an 80% chance. Why?

The first obvious reason is inflation the recent fall in the trade-weighted value of the pound will obviously slightly increase the risk of more appearing (note by the way that the consumer price index (CPI) has risen by over 17% since 2009 inflation is not dead).

Advertisement - Article continues below

However, the second reason is more interesting. Perhaps the BoE, now the scaremongering phase of the Brexit referendum is over, is admitting internally at least that it really isn't the end of the world they won't actually know the extent to which the vote has affected the economy (for good or bad!) until they have some data from the post-vote period. Or, as the analysts at State Street put it: "there is some uncertainty as to how rapidly the economy will actually slow" as a result of Brexit.

This is, we think, pretty good news. The BoE is no longer making unsubstantiated assumptions about the future it is noting that the UK is extraordinarily politically stable and waiting to see how the growth and inflation data changes first.

The City, unfortunately, isn't taking the same small steps towards rationality. 100% of the press releases we have received so far assume that there will be fast deterioration towards the end of the year; that the deterioration will be 100% Brexit related; and that the BoE will cut aggressively' in August as a result. We wonder.

Like many people, we aren't convinced that loose monetary policy is working and we would also say that the BoE does still have an inflation mandate. Inflation has spent nearly 70% of the last decade above 2% (Pantheon Economics) and if rising import prices now mean that inflation forecasts surge into the 3% range will Mark Carney really feel comfortable cutting the UK base rate to almost zero?

There is no accounting for the behaviour of central banks these days and, under the circumstances Carney won't want to disappoint the market too much. But an aggressive cut combined with a round of QE surely isn't as much of a given as the market expects.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Boris Johnson’s grand infrastructure plan needs some small print
UK Economy

Boris Johnson’s grand infrastructure plan needs some small print

Grand infrastructure projects are all very well, but it is the small stuff that delivers the big returns, says Matthew Lynn.
5 Jul 2020

Most Popular

How “support” and “resistance” can help you spot trading opportunities
Sponsored

How “support” and “resistance” can help you spot trading opportunities

Technical analysis can help traders manage risk and decide where to enter and exit a trade. One simple form of technical analysis is the concept of “s…
6 Jul 2020
House price crash: UK property prices are falling – so where next?
Property

House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020