The Bank of England should raise interest rates on Thursday and reverse part of the emergency stimulus deployed after the Brexit vote, according to a former deputy governor.
Sir John Gieve said there was a “very strong case” for raising rates because the economic slump predicted in the wake of the EU referendum result had not materialised, reports The Telegraph.
Ahead of the Bank’s decision, Sir John said uncertainty surrounding the UK’s future relationship with its biggest trading partner was likely to weigh on growth for the next few years.
However, the former deputy governor for financial stability said: “I don’t think in itself it should be causing the Bank to hold rates down to pump up demand.”
Bank policymakers, including Governor Mark Carney, voted to cut interest rates to a fresh low of 0.25 per cent a year ago as part of a four-pronged stimulus package designed to support jobs and growth.
Investors and economists believe the Bank will keep interest rates at a record low on Thursday, although policymakers are expected to remain divided on whether to tighten policy after a 5-3 vote split at its last meeting in June.
Kristin Forbes, one of the Bank’s most hawkish policymakers, has since left the Monetary Policy Committee.
Sir John said: “I think there is a very strong case for reversing the quarter percentage point cut from last year. The rationale behind that was there was a risk that the shock of the vote would drive [demand] down excessively in the short term and the Bank tried to prevent that.
Speaking at an event organised by Fathom Consulting, Sir John highlighted that the Bank has already reversed measures implemented in the wake of the Brexit vote that were designed to free up lending to the economy.
He said it was now “quite difficult to argue that they shouldn’t reverse the 0.25 percentage point cut” given the continued drop in unemployment, which now stands at the rate the Bank assumes will start to generate inflationary pressures as a tighter labour market drives up pay.
Sir John said it was not the Bank’s job to “resist” rebalancing towards exports by trying to boost consumer demand with low interest rates.
Erik Britton, director at Fathom and a former Bank of England economist, agreed that interest rates should rise.
“If not now, when? If we can’t do it when inflation is above target, when unemployment is at its ‘natural rate’ and when growth is reasonable, I don’t know when we’re going to do it,” he said.
Speaking at the same event, Sir Charlie Bean, also a former Bank deputy, suggested that clarifying the UK’s future relationship with the EU sooner rather than later would boost the British economy and exports.
While Fathom noted that most exporters had used the benefits from a weaker pound to boost their margins, he added: “That doesn’t imply there won’t be an increase in net exports because the increase in profitability of exporters should encourage expansion in those sectors.”
Sir Charlie said exports were “a natural area” for stronger growth following the drop in sterling’s value as the global economy continues to strengthen.
While he said it was “difficult” to see benefits in the coming months, he said the boost to exports was more likely to materialise when the UK’s trading relationships become clearer.
Signs of caution were also evident in the construction sector, which suffered a fall in new orders last month as companies refused to commit to major new projects and the sluggish housing market dented residential activity.
Growth in the sector slowed to its lowest level since August 2016 as caution among clients dragged the purchasing managers’ index (PMI) – an influential survey run by IHS Markit – down to 51.9 in July, sharply lower than the 54.8 recorded in June.
This is still above the 50 level that indicates growth, but represents a slowdown in the rate of expansion.
Sir Charlie, who currently serves as a senior official at the Office for Budget Responsibility, said a dramatic drop in the saving ratio – which measures the amount British households have available to save as a share of disposable income – suggested Britons were likely to cut back on spending.