BoE known hawk Michael Saunders said in a speech that assuming a smooth Brexit, the MPC as a whole judged that further raise hikes are needed over time. And “my own hunch is that, conditioned on our Brexit assumptions, capacity pressures will probably build somewhat faster than envisaged in our latest Inflation Report projections, reinforcing upward pressure on pay growth.” In that case, “we would probably need to return to something like a neutral stance rather earlier than implied by the current yield curve.”
Nevertheless, he also acknowledged “that assumption of a smooth Brexit adjustment is itself uncertain”. And, “any such resolution of Brexit uncertainties may change the economic outlook, perhaps substantially”. More importantly, “the monetary policy implications of different Brexit outcomes could go either way, depending on the effects on supply, demand and the exchange rate.”
In one example, Saunders said transition to a relatively close economic relationship with the EU could boost confidence and propel investment. The same factors could trigger rise in Sterling exchange rate. The next effect could be higher growth and lower inflation. In this case, it’s unclear if more tightening is appropriate.
In another example, revert to WTO trading rules would weaken business confidence and hit investments and hiring. That would drags on growth but at the same time Sterling too. There would also be resultant boost to inflation reinforced by extensions of tariffs. And the net effect is higher inflation and lower growth. The monetary implications “could go in either direction.
