The Bank of England’s chief economist has called for a big package of measures to support the UK’s post-Brexit economy, stressing the need for a prompt and robust response to the uncertainty.
Andy Haldane made it clear the Bank’s monetary policy committee would do more than merely cut interest rates from their already record low of 0.5% when it meets in August.
The Bank’s chief economist used a speech to warn that decisive action was required at a time when confidence had been dented by the shock referendum result.
“In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn.
“Given the scale of insurance required, a package of mutually complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly. By promptly I mean next month, when the precise size and extent of the necessary stimulatory measures can be determined as part of the August inflation report round.”
The Bank surprised the City when it left interest rates on hold at its July meeting held this week, but the minutes of the MPC’s discussions said most of its nine members thought an easing of policy would be required in August.
The tone and content of Haldane’s speech suggest that the MPC will use public appearances to make the case for strong action in August. Options include cutting interest rates to 0.25% or lower, restarting the Bank’s £375bn quantitative easing scheme and providing cut price loans to banks under the funding for lending scheme.
Signs that the Bank is planning a major stimulus package next month put a halt to the upward move in the pound, which had rallied after Threadneedle Street left rates on hold. Sterling lost a cent against the dollar to stand at $1.3245.
In a reference to the prison movie The Shawshank Redemption Haldane said: “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same ‘luxury’.”
Haldane originally made his speech in Port Talbot a week after the 23 June referendum. It has only just been released in an amended form to include references to the Bank’s July interest-rate decision and to recent economic developments.
The Bank’s economist said there had been signs of the economy struggling even before the Brexit vote, but added: “Over the past month, the outcome of the EU referendum has added another important ingredient to this mix. It has increased materially the degree of uncertainty – economic, policy, and political – around the UK’s economic recovery.”
Haldane said the economy was unlikely to crash but was likely to slow, perhaps markedly in the quarters ahead. “While companies and consumers might not be slamming on the brakes and going into reverse, as in 2008, some are likely to be going down a few gears, perhaps even moving into neutral.
“External economists expect the UK economy to tread water over the next few quarters. That means the amount of slack in the UK economy is likely to begin steadily rising in the period ahead, perhaps causing unemployment to rise.”
Haldane’s remarks came as official figures showed that the construction industry - which accounts for around 6% of national output - was struggling before the Brexit vote.
The sharpest fall in housebuilding since 2014 meant that construction output in May was 2.1% down on April and 2% lower than in May 2015.
Housing output has now fallen in every month this year apart from February, and things could slow further after the 23 June Brexit vote.
The latest figures from the Royal Institution of Chartered Surveyors, published earlier this week, found that buyer interest and expectations of future sales withered in the post-referendum period.
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