BREXIT HOLDS MONETARY POLICY KEY
Recent comments from the Bank of England (BoE) firmly reinforce the message that near-term monetary policy will be inextricably linked to Brexit.
Members of the Monetary Policy Committee (MPC) unanimously voted to leave rates unchanged at 0.75%, following their meeting on 1 November.
A similar outcome is widely anticipated when the MPC next reconvenes on 20 December, with policymakers expected to ‘sit on their hands’ until the
full implications of Brexit become clear. Comments made by BoE Governor Mark Carney immediately following the November meeting also made it clear that the monetary response to Brexit could involve either a tighter or looser stance. Specifically, Carney said: “Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction”.
Further comments made by Michael Saunders, another MPC member, reinforced this view. Saunders suggested that a smooth Brexit would boost
the UK economy and could therefore lead to rates rising more quickly than money markets currently envisage. However, he also warned this was not
inevitable as the inflationary pressures of a stronger economy could be offset by the disinflationary impact of sterling appreciation. While it does therefore appear clear that future monetary policy will largely be dictated by Brexit, it is less clear what the specific monetary response to
Brexit will actually be.