BoE's Saunders: Monetary policy cannot prevent necessary adjustment in economy to EU exit
|Below are some key takeaways from the speech delivered by Michael Saunders, an external member of the Bank of England's MPC, at the CBI Annual Economic Dinner.
- Looking ahead, assuming the economy adjusts smoothly to an average of Brexit end states, economic growth is likely to continue to outpace potential.
- Assuming that smooth adjustment to Brexit, the MPC as a whole judge that some further rises in interest rates probably will be needed over time, in order to return to a more neutral policy stance and thereby keep inflation on target over time.
- That assumption of a smooth Brexit adjustment is itself uncertain.
- Recent business surveys, including those by the CBI, suggest that Brexit uncertainties have caused a marked drop in business confidence so far in Q4.
- If there is a withdrawal agreement then the range of options for the possible Brexit end state also may narrow.
- A smooth transition to a relatively close economic relationship with the EU would probably boost business confidence, with pent-up demand propelling investment and hiring.
- Conversely, an early move to WTO trading rules with no transition would probably see business confidence weaken, hitting investment and hiring.
- Sterling would probably depreciate, with the resultant boost to inflation reinforced by any extension of tariffs.
- The monetary policy implications could go in either direction.
- Monetary policy cannot prevent the necessary adjustment in the economy to EU exit.
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