UK economy after Brexit: lower growth the ‘new normal’

During a pivotal week for the UK, IGTV spoke to Andrew Sentance, former Monetary Policy Committee member at the Bank of England, about the outlook for the UK economy and monetary policy in a post-Brexit world.

BoE’s no-deal Brexit predictions ‘totally unrealistic’

The Bank of England (BoE) appears to be divided on the future path of interest rates in the case of a no-deal Brexit. Officially, the bank said rates are as likely to rise as fall. However, two Monetary Policy Committee (MPC) members - Silvana Tenreyro and Gertjan Vlieghe - have suggested that looser policy might be more appropriate. Former BoE rate setter Andrew Sentance said a no-deal will be ‘quite a negative scenario for the UK economy’. However, he is less pessimistic than the BoE, which warned in November that a no-deal would create the worst recession since the 1930s. Sentance said these predictions are ‘totally unrealistic’ and ‘a product of the assumptions that they chose.’ BoE governor Mark Carney has since wound back his negative forecasts telling the House of Lords economic affairs committee last week that while there ‘will be a material economic shock’ from a no-deal it could be less harmful than his November predictions. Sentance said a no-deal is ‘something I don’t want to see, and I hope we don’t see.’

Lower UK growth is the ‘new normal’

Last week, the Organisation for Economic Co-operation and Development (OECD) downgraded its growth outlook for the UK along with most G20 economies over the next two years. The think tank now expects Britain will grow by 0.8% this year, falling below 1% for the first time in a decade. Sentance told IGTV the UK is entering a ‘new normal’ where ‘1% to 2% growth is quite good’.

Brexit has impacted the UK economy through two key channels argues Sentance. Firstly, through the post-referendum sell-off in the pound which ‘is still languishing in pretty weak territory,’ causing a ‘squeeze on consumers’. Secondly through ‘the uncertainty impacting investment’. The UK has suffered a sharp slump in business investment, which shrank by 1.4% in the fourth quarter (Q4) of 2018. That was the biggest drop since the start of 2016 and marked the fourth straight quarter of declines.

Aside from the strain from Brexit, Sentance said ‘we are reaching a more mature phase of the global economic cycle so the global economy is slowing down’, arguing a global deceleration will weigh on UK growth via its trading partners.

Sentance says he’s ‘lost confidence’ in MPC

Sentance has criticised the course of action taken by the UK’s central bank in recent years. In an interview with IGTV, Sentance said ‘I have lost confidence in their strategy of really trying to normalise monetary policy’. He thinks the BoE will follow a ‘rather predictable course of doing very little’.

BoE doesn’t have a ‘very sound exit strategy’ from low rates

The central bank’s bank rate is expected to remain on hold at 0.75% at the next monetary policy committee (MPC) meeting on Thursday 21 March. Sentance said ‘if I had been recommending a policy for the UK, it would have been, raise interest rates to somewhere between 2% and 3%’ and ‘then pause’. Looking beyond the UK borders, his suggestions are similar to the path taken by the Federal Reserve (Fed) in the US, which left rates unchanged in January and signalled a pause to future interest rates hikes following a steady stream of increases since 2016. Sentance said, ‘the Fed has had quite a sensible policy.’ Meanwhile in Europe, having ended quantitative easing (QE) in December, the European Central Bank (ECB) shifted back towards a more dovish stance last week by adjusting its forward guidance to suggest rates would remain lower for longer and by offering fresh cheap loans to eurozone banks to support lending in the economy. Sentance said ‘the ECB is in a more difficult position because they’ve been dabbling with negative interest rates and they don’t seem to have an exit strategy’, adding ‘the BoE has a similar problem. We don’t seem to have a very sound exit strategy’.

UK monetary policy ‘geared too strongly’ towards inflation

The BoE’s goal is to keep inflation at 2% unlike the Fed which has a dual mandate to maximise employment while keeping price levels stable. The latest figures for UK inflation as measured by the consumer price index (CPI) came in at 1.8% in January, a two-year low, down from 2.1% in December. Sentance who was an inflation hawk during his time as member of the MPC from 2006 to 2011, said the UK’s monetary policy framework ‘has been geared too strongly around inflation’ advocating for ‘a broader economic policy framework, which not only looks at inflation but looks at the overall impact of interest rates on the economy’.

Replacing Carney not ‘handled particularly well’

Governor Mark Carney is due to step down as governor of the BoE in January 2020. He extended his tenure at the helm in September by seven months in order to ‘support a smooth exit’ from the European Union according to UK Chancellor Philip Hammond. Sentance said, ‘the whole process of replacing Mark Carney has not been handled particularly well and there really should have been a clear end date for his governorship.’


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