In the great scheme of things, the UK was due to exit the EU on Friday, so a great deal more interest ought to have been focussed on the decision of the Bank of England’s Monetary Policy Committee (MPC) and its prognostications on the Bank’s immediate post Brexit interest rate posture. However, the Brexit can was kicked down the road and the earliest the UK may leave is 12th April. Even this is no longer certain with a range of possible outcomes from remaining in the EU to crashing out with no deal or transition all still in play.
In the event, wisely, the MPC has decided to keep its powder dry and has left rates unchanged at 0.75% with a unanimous vote of its nine members. Rates have been at this level since August 2018.
In a masterly piece of understatement, the MPC minutes noted that the UK’s economic outlook depended “significantly on the nature and timing of the EU withdrawal”. Equally: “the appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction."
The reason why rates could move in either direction is obvious. A bad exit (and frankly, there are no good ones) would cause harm to the economy, so cutting rates below 0.75% might be required to boost economic output. However, such a scenario could see the Pound come under very significant negative pressure and it may be necessary to significantly increase interest rates to protect the value of the currency. A weak currency helps make UK exports more attractive, but it has the effect of pushing up the costs of imported goods, including food, of course.
At the moment, UK inflation is running at 1.9% (February data) which is on the Bank of England’s target for low, stable inflation of 2% ±1%. The Bank is predicting that it will remain close to target over the coming months, but again, this will depend on exactly how Brexit unfolds.
It is possible that the Bank may schedule an additional meeting of the MPC if the political circumstances warrant it.