SCUNTHORPE, England (Reuters) – Bank of England Chief Economist Andy Haldane said he would be very wary about lowering interest rates unless there is a sharp economic downturn because the British economy is at full capacity and cannot depend on BoE stimulus for growth.
Recent weak economic data reflected Brexit volatility while consumer confidence and the job market remained strong, and Britain was in a different policy position to the United States and the euro zone, Haldane said in a speech.
He noted that British economic growth was expected to stall in the second quarter and business investment was “strikingly and significantly subdued” ahead of Brexit.
“My personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn,” he said at an event for local businesses in Scunthorpe, northern England.
Haldane said that the uncertainty about Brexit meant he preferred no change in borrowing costs for now.
“With the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong,” he said in the speech.
Market bets that the BoE was more likely to cut rates than to raise them did not offer a good guide to the BoE’s policy intentions, due to uncertainty about the terms on which Britain would leave the EU later this year.
If Britain did leave the EU without a deal on Oct. 31 – something incoming British prime minister Boris Johnson has not ruled out – Haldane reiterated the BoE’s position that it would not automatically cut rates, and could even raise them.
“If a ‘no deal’ were to lead to a sharp fall in sterling and a sharp rise in inflation expectations, it is not clear the MPC could cut interest rates, as the market expects, if it was to meet its inflation mandate,” he said.
More broadly, markets and the public had grown too accustomed to ultra-low interest rates since the 2008 financial crisis, he added.
“It is important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop,” Haldane said.
“Super-charging the supply-side of the economy is what is now needed,” he added.
(Reporting by David Milliken; Editing by William Schomberg)