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No-deal Brexit could mean near-zero interest rates – Bank policymaker - THE GUARDIAN UK

JULY 12, 2019

MPC member Gertjan Vlieghe issues warning during speech in London

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Gertjan Vlieghe


 Gertjan Vlieghe’s comments on a no-deal Brexit and interest rates go further than other Bank of England policymakers. Photograph: Henry Nicholls/Reuters

A no-deal Brexit could result in a prolonged period with interest rates at a record low level of almost zero, according to one of the Bank of England’s key policymakers.

In signs of growing Threadneedle Street concern about the fragility of the economy, Gertjan Vlieghe, a member of the rate-setting monetary policy committee, said he would be prepared to cut borrowing costs aggressively in the event that the UK left the EU without a transition agreement on 31 October this year.

The Bank’s official position is that interest rates could move in either direction in the event of a disruptive no-deal scenario, because it would need to assess which was the greater threat: recession or rising inflation.

But Vlieghe used a speech in London to indicate that he saw the risks of a collapse in demand as greater than the risk of inflation caused by the higher costs of imports triggered by a fall in the value of the pound or by the imposition of tariffs.

Bank of England's Vlieghe: no-deal Brexit could mean near zero interest rates - as it happened

“On balance, I think it is more likely that I would move to cut [the] bank rate towards the effective lower bound of close to 0% in the event of a no-deal scenario,” Vlieghe said during a speech at Thompson Reuters.

Interest rates were cut to a record low of 0.25% in the aftermath of the EU referendum but have since been raised twice to stand at 0.75%. Vlieghe’s comments suggest that he would be prepared to support something even more drastic than the emergency rate cut announced in August 2016.

He added: “It is highly uncertain when I would want to reverse these interest rate cuts, which would either be driven by an improvement in the underlying economy as the disruptive impact of no deal fades, or by upside risks to inflation if the exchange rate and tariff driven boost to inflation puts upward pressure on medium-term inflation expectations.”

Vlieghe’s comments go further than other Bank of England policymakers. Some have signalled that interest rates would need to be trimmed in the case of a no-deal Brexit but have stopped short of indicating how far they could drop.

The probability that Britain will leave the bloc without a transition agreement has grown since Theresa May announced that she was stepping down as prime minister. Jeremy Hunt and Boris Johnson, the Tory leadership candidates, have said they are prepared to opt for no deal if necessary.


Vlieghe said the outlook had deteriorated since his last speech on the economy in February, with the UK no longer being supported by robust global growth. Job vacancies were no longer rising and the upward pressure on wages had stabilised. The Bank has been assuming that the economy moved sideways in the second quarter of 2019, although there is speculation in the City that the official data next month will show a small contraction in output.

The MPC policymaker said that even with a smooth Brexit, he envisaged that it would be a year before interest rates were raised to 1% and two years before they hit 1.25%. By 2022, depending on the state of the global economy, they might still only be 1.75%, well below their 5% level at the time of the banking crash of 2008.

Earlier this week, Silvana Tenreyro, another member of the nine-strong MPC, also warned that the state of the economy made it unlikely that she would vote for higher interest rates.

“Coupled with signs of a weaker global outlook, recent developments likely lengthen the period until there is a sufficient pickup in inflationary pressures for me to vote to raise Bank Rate. I do not currently anticipate such a pickup in the next few months,” she said.

The comments made by Vlieghe and Tenreyro point to a softening of the official MPC line on interest rates in its next quarterly Inflation Report due early next month. In May, the MPC said it expected a gradual and limited tightening of policy.

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