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Vlieghe Sees Need for BOE Stimulus If Brexit Uncertainty Endures
2019-10-15 12:30:00.7 GMT

By David Goodman and Lucy Meakin
(Bloomberg) — Continued Brexit uncertainty would probably
depress U.K. economic growth and require further monetary
stimulus from the Bank of England, according to policy maker
Gertjan Vlieghe.
In a speech in London Tuesday, Vlieghe also suggested that
even in the case of an immediate Brexit deal, the argument for
near-term interest-rate hikes had all but disappeared. Economic
slack in the U.K. has increased this year, while the global
outlook has deteriorated, he said.
The U.K. is at crucial stage in its Brexit talks, racing to
secure a deal that will allow it to leave the European Union on
Oct. 31. Without it, Prime Minister Boris Johnson may have to
seek another delay, although he maintains that a no-deal
departure remains a possibility.
In a particularly stark passage of the speech, Vlieghe laid
out three possible Brexit scenarios, and his likely response to
each:
* A near-term Brexit deal, may “stimulate investment
sufficiently to prevent the need for easier monetary policy, and
put gradual and limited rate hikes back on the agenda,
eventually”
* A no-deal Brexit “is more likely to require monetary stimulus
than tightening,” although, “the direction for interest rates is
not automatic”
* A scenario where neither comes to pass, and the U.K. faces
entrenched Brexit uncertainty, “is likely to keep economic
growth below potential, and require some monetary stimulus”

The speech comes amid growing signs of a split on the BOE’s
Monetary Policy Committee over the correct way to react to a
potential Brexit extension.
Deputy Governor Dave Ramsden said in an interview with the
Daily Telegraph this week that there was “less of a case for a
more accommodative monetary position” amid the “entrenched
uncertainty” another delay would bring. That put him at odds
with former hawk Michael Saunders, who said in a speech last
month that the BOE may need to cut rates even if the U.K. avoids
a no-deal exit, and stressed that the uncertainty shouldn’t be a
“recipe for policy inertia.”
Vlieghe’s speech mainly focused on how monetary policy has
developed since the financial crisis. He said it was
“appropriate” for him “to warn of the risks that it may be more
difficult to fulfill our mandate in the future with the current
neutral rate and inflation target if we are hit by a recession
similar to those in the past.”
“We are not at the point where monetary policy has run out
of ammunition, but the risk of that happening in the future has
clearly risen relative to the pre-crisis period,” he added.
He also discussed the debate over raising central banks’
inflation targets, which he said was a debate worth having,
albeit not in the MPC.
He touched on the potential for helicopter money, or direct
cash handouts, which he said could stoke runaway prices as
easily as it could trigger stronger growth. It would suspend
both the use of interest rates as a tool and the inflation
target.
“Before we, as a country, give up central bank operational
independence, I would suggest that, unless we find ourselves in
a truly severe deflationary crisis, we try some less radical
options first,” he said.

To contact the reporters on this story:
David Goodman in London at dgoodman28@bloomberg.net;
Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editors responsible for this story:
Paul Gordon at pgordon6@bloomberg.net
Brian Swint