As the anniversary approaches of the Brexit referendum it is not just political life that has been buffeted by the referendum’s fallout. Yesterday, Bank of England MPC member Andy Haldane said he would most likely be voting for higher rates later this year. This was a day after his boss, Mark Carney, indicated that rates shouldn’t go up. This is the central banker’s equivalent of the different approaches to Brexit voiced by Philip Hammond and Theresa May.
Wind back to the policy response after last year’s referendum. BoE action was fast and furious as rates were cut by 25bps and a further round of gilt and corporate quantitative easing was announced. For some this response was an outcome of the pessimistic expectations for the economy from the ‘Project Fear’ playbook and was ahead of events. However, the solid growth of the last year is starting to lose energy. Weak-currency-induced inflation and continued high debt levels are playing havoc to consumers’ real spending power. Wage inflation is failing to keep pace with inflation, keeping pressure on both consumers and politicians.
So what is the difference between Haldane and Carney? To be fair, Haldane refers to “partial withdrawal of the additional” policy measures from last summer – i.e. rates can go back to where they were prior to last year’s vote, back to 0.5%. But the current environment of decreasing consumer spending power and the uncertainty over the Brexit negotiations are not a great backdrop for rate rises – Carney’s point. Furthermore, the election has thrown a “dust cloud of uncertainty”, to borrow from Haldane. The politics of austerity are in the spotlight too, with dwindling Tory enthusiasm for it along with the fallout from the Grenfell Tower tragedy. Despite likely looser fiscal policy it also feels more likely that a soft rather than hard approach to monetary policy is on the cards.