The Bank of England’s decision to cut interest rates by 0.25 per cent last August in the wake of the Brexit vote may have saved 250,000 British jobs, Mark Carney has suggested.
In a speech to the London School of Economics, the governor said that if the Bank’s Monetary Policy Committee had not acted in this “timely, coherent and comprehensive way” an “output gap” of 1.5 per cent of GDP would have opened up in the UK economy, “implying around a quarter of a million lost jobs” reports the Independent.
“That would have meant even more lost output and a total disregard for higher unemployment. Given our remit that would have been undesirable,” Mr Carney said.
The governor’s remarks are likely to irritate leading Brexiteers, who are still angry at what they see as Mr Carney’s encroachment into political territory during the referendum campaign, when he warned a Leave vote could lead to a “technical recession”.
Some Brexiteers also complain that the Bank panicked when it cut rates by 0.25 per cent last August and restarted its money-printing programme, and that the economy never required such a stimulus.
The economy grew by 0.6 per cent in the immediate three months following the 23 June Brexit vote, according to the Office for National Statistics – considerably stronger than the Bank of England forecast in August.
The latest industrial surveys also suggest that momentum was largely maintained in the final quarter of 2016.
But in his LSE speech Mr Carney sounded a warning about the sustainability of the economy’s post-Brexit growth, which he described as “increasingly consumption-led”.
“At present, households appear to be entirely looking through Brexit-related uncertainties,” Mr Carney said, contrasting this with the major sell-off of sterling in the foreign exchange market.
The pound is currently trading close to a 31-year low against the dollar.
But the aggregate household savings ratio has fallen close to historic lows and unsecured household borrowing is rising at an annual rate of close to 10 per cent, its fastest since 2005.
“Ultimately, the tension between consumer strength on the one hand and the more pessimistic expectations of markets on the other will be resolved,” Mr Carney said.
“How household spending evolves, and the inter-temporal trade-off that households strike (when borrowing), will be important considerations over the next year. The Monetary Policy Committee will continue to monitor these dynamics.”
The MPC has said that the next move in interest rates could be either up or down – and will depend on economic data over the next year.
Mr Carney again stressed that there are “limits to the extent to which above-target inflation can be tolerated”.
The Bank currently expects inflation to rise above its 2 per cent target later this year and for GDP growth to slow from around 2 per cent to 1.4 per cent.
It has projected the unemployment rate rising from 4.8 per cent now to 5.6 per cent in 2018.
The Bank will present its new quarterly economic forecasts in February.