The Bank of England has left its interest rates unchanged at 0.75%. This will come as a surprise to very few whilst the denouement of the Brexit horror show hangs in the balance.
If the UK crashes out of the EU next March with no deal in place and, consequently, no transition agreement either it is a racing certainty that Sterling will see a significant fall. Investor confidence is also likely to take a big hit and the economy will decline. In this circumstance, the Bank is going to face a dilemma. On the one hand, cutting interest rates and boosting QE are likely to breathe a little life into the economy, but on the other, a badly debased currency means that imports of finished goods and raw materials will spike. The only way to boost the Pound would be to make a significant hike to interest rates in a bid to attract currency investors – it is unlikely that a 0.25% hike would cut the mustard. The downside of such a move is that it will push up borrowing costs in the UK for businesses and individuals who will see mortgage rates rising and personal loans and overdrafts become dearer.
However, comments made by Mark Carney have been interpreted to suggest that a “smooth” Brexit where a deal and a transitional period are in place before Brexit indicate that interest rates may move higher anyway. Speaking of deferred investment plans, Carney said: "We do expect a rebound in demand. Business is taking a cautious approach right now as we are at a point of maximum uncertainty, so we have some sense of what is being held back, so we will see a rebound in investment.”
Some pundits have taken this relatively innocuous statement to mean that interest rate hikes may be in the pipeline from the New Year if a Brexit deal is agreed. So, a no deal Brexit will probably cause significant interest rate rises whereas a “smooth” Brexit will push them up more modestly. In either event, it would appear that the age of ultra-cheap money at the Bank of England is drawing to a close.