The Bank of England held interest rates at 0.75% last time around, mentioning ‘Brexit uncertainties’ frequently in its decision. So, once Brexit comes, are we likely to see an interest rate hike or fall?
Changes to interest rates can have far-reaching consequences, on everything from your personal finances to the wider economy. The Bank of England sets interest rates, also known as the base rate, in response to current events and expected economic performance, with the aim of keeping inflation around its 2% target. At its latest meeting on 19 September, the Bank’s monetary policy committee (MPC) voted unanimously to keep interest rates at 0.75%.
In the past, the Bank has described holding rates as a ‘wait-and-see’ approach to Brexit. But with the deadline looming ever-closer, the Bank might soon have to be more decisive. After August’s growth figures revealed the UK economy shrank by 0.2% – the first contraction since 2012 – many in the City are called for a rates cut to increase spending and stimulate growth.
The MPC did not bow to this pressure, and the base rate was kept the same in September. The MPC tends to let is decisions do the talking, rarely revealing what those might be ahead of time. So far, it has taken a ‘wait and see’ approach to Brexit, meaning we might not see any base rate changes until after we leave the EU.
Still, key decision-makers have hinted at what form post-Brexit monetary policy could take:
- Since the referendum, Carney has been adamant that interest rates could go up or down after Brexit, depending on the circumstances.
- Speaking to the Treasury Select Committee late in February, Dr Gertjan Vlieghe went slightly further than Carney, saying ‘just because [interest rates] could go in either direction, doesn’t mean that each one is equally likely’. Despite this, Vlieghe did outline how a likely fall in the pound’s value could lead to higher inflation, which would require the MPC to take action.
- In the event of a no-deal Brexit, most commentators expect that the most likely response is for rates to fall in order to stimulate a weakened economy. But, as the Bank says, that is by no means certain. A fall in the value of the pound will undoubtedly lead to higher prices and the Bank may find itself in a difficult position, balancing economic stimulus with tackling inflation.’