The deputy governor of the Bank of England seemed to point to a speedier rise in the base rate than many expect in a speech yesterday (15 November).
Dave Ramsden, the former Goldman Sachs economist, warned that Brexit damage could be done fairly soon, rather than impacting the UK gradually.
He said this might force the Bank of England to raise rates more quickly to keep inflation under control.
In a speech at the London School of Economics, he said that there had been a “persistent belief” that European Union withdrawal is something that necessarily requires low interest rates.
“If so, then I think the belief has been overdone,” he said.
“I’m certainly not going to argue here that interest rates will inevitably rise as Brexit proceeds.
"Apart from anything else, it isn’t the only show in town. Economic shocks come along all the time, in both directions.
"However, my main point is that, given all the moving parts, even the marginal impact of EU withdrawal on the appropriate level of UK interest rates is ambiguous."
To adapt the football manager’s cliché, we can only play the economy that’s in front of us.Dave RamsdenHe pointed to recent surveys showing that some supply chains are already unwinding in anticipation of Brexit.
This could hit supply, prompting the Bank to raise the base rate even if the economy suffers a sharp growth slowdown.
Mr Ramsden said: "Predicting others’ predictions isn’t easy, and I don’t think the balance of risks to inflationary pressure, and therefore future interest rates, is obvious.
"In the meantime, the Monetary Policy Committee has little choice, it seems to me, but to take the economic data at face value.
"To adapt the football manager’s cliché, we can only play the economy that’s in front of us. What’s been in front of us for several months is an economy with above-target inflation and dwindling spare capacity.
"That’s why I think it was the right thing to remove a degree of monetary accommodation. And while things might change – they always do – we will continue to act in a way that ensures stable inflation over the medium term while still providing what support we can to jobs and economic activity."
Guy Stephens, technical investment director at Rowan Dartington, said the recent interest rate rise and the preceding guidance from the Bank of England have stopped speculators shorting sterling and provided some stability.
That said, he pointed out if the Brexit negotiations do take a decisive turn towards a ‘no deal’ scenario, which is now being seriously considered in Brussels and on Wall Street, then we would probably see a leadership challenge.
Mr Ramsden said: "Weak leaders are always bad for economic growth, especially when the alternative is so polarised in political view."
