In a move that would affect mortgage rates and the finances of millions of Britons, interest rates could be raised even if economic growth disappoints amid Brexit, according to Broadbent, who sits on the Bank’s Monetary Policy Committee (MPC).
The deputy governor today used a speech in London to challenge perceptions that the Bank of England will keep policy loose as the UK leaves the political union – raising the possibility that financial markets are underestimating the likelihood of future rate rises.
Broadbent stressed that the MPC targets inflation when setting the base rate.
In part, the differing attitudes towards Brexit between financial markets and households have contributed to inflation soaring above the Bank’s 2% target, Broadbent said.
Speaking to an audience in London today, the policymaker said: “My main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the appropriate level of UK interest rates is ambiguous.”
He added: “The effects of Brexit on inflation, and ultimately on the appropriate level of interest rates, are altogether more uncertain and more complex.
“They’re certainly too complex to justify the simple assertion that Brexit necessarily implies low interest rates.”
Interest rate cut not because of Brexit
The Bank of England cut interest rates to 0.25% following the Brexit vote – this wasn’t because of the outcome, but because of the sharp fall in business and consumer confidence, according to Broadbent.
Policymakers have forecast another two hikes to the base rate over the next couple of years.
But Brexit expectations and inflation – and ultimately interest rates – are not on a path that’s easy to predict, the policymaker said.
He added: “In the meantime, the MPC has little choice, it seems to me, but to take the economic data at face value.
“To adapt the football manager’s cliché, 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.”