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19 May 2016

Financial Times: BoE’s Vlieghe calls for Brexit rate cuts


The Bank of England should be ready to cut interest rates to stimulate spending if any economic bounce after a Remain vote in the EU referendum is disappointing, according to a member of the Bank of England’s Monetary Policy Committee.

Gertjan Vlieghe told the London Business School that Brexit would create “significant uncertainty” and the UK was “likely to experience lower growth and higher inflation”.

But he fears that even if Britain votes to stay in the EU any economic bounce will be shortlived. Mr Vlieghe said a marked slowdown during the past two years “adds up to a significant downward revision in growth and inflation, to which monetary policy has not responded so far”.

He thinks the level of interest rates needed to keep the economy on an even keel has declined sharply in recent years. “Interest rates are low because that is what the economy needs,” he said.

Ageing populations imply lower levels of spending as does a concentration of wealth among the richest, thus requiring lower interest rates over the long term to encourage enough spending overall. High levels of debt themselves also require low rates, he added.

Signalling this meant low interest rates were likely for a very long time, he said these features of the modern UK economy “might persist for years, even decades”.

The one event that he noted might change his view in the short term would be a vote to leave the EU, which would present the MPC with “an entirely different set of policy challenges”.

Instead of the “improvement in growth” he expected after a Remain vote, a Brexit result was likely to bring “significant uncertainty about the future of the UK’s trading relationships, a meaningful drop in domestic demand and in the exchange rate”.

The capacity of the economy to produce goods and services might also decline, he said, because it would take some time for the economy to “adjust to new trading relationships and investment patterns”.

Mr Vlieghe added: “The UK is therefore likely to experience lower growth, and higher inflation for a period as a weaker exchange rate pushes up import prices.” [...]

Full article on Financial Times (subscription required)

 


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