Brexit: UK interest rates more likely to fall than rise after no deal, Bank of England economist warns

BoE boss Mark Carney said it was ‘guaranteed’ a no-deal Brexit would lead to a sharp drop in UK economic growth

Interest rates are more likely to be cut than hiked in the event of a no-deal Brexit, an economist from the Bank of England warned on Tuesday.

Gertjan Vlieghe, a member of the Bank’s monetary policy committee, told the Treasury Select Committee interest rates “could move in either direction” after the UK leaves the EU.

However, he added that if Brexit goes ahead with no agreement in place, the Bank will either hold or cut rates.

If a no-deal Brexit becomes reality, he said “there is going to be some economic disruption, possibly severe”. This in itself would not prompt any interest rate move, Mr Vlieghe said.

“What matters is whether as a result of that disruption you get a larger fall in business confidence, household confidence and therefore demand, which does require monetary policy to support the economy,” he added.

The Bank has forecast a no-deal Brexit would lead to a jump in inflation, driven partly by weaker exchange rates and the impact of World Trade Organisation tariffs.

“On balance the risk is that the hit to confidence will be sufficiently large that we won’t have to tighten monetary policy – we will be thinking about either keeping policy on hold or easing.”

Easing monetary policy means the Bank will cut interest rates.

When asked why confidence is likely to go down in the event of a no-deal Brexit, Mr Vlieghe said: “Previously we were talking in hypotheticals about expectations of possible future disruption, which some people put a lot of weight on, some people don’t.

“Now we’re talking about actual disruption happening. So even those people who were in the camp of, ‘Well I don’t think that’s very likely’. If it’s actually happening, they will update their views very quickly.”

Meanwhile, Bank of England governor Mark Carney reiterated his warning that a no-deal Brexit would lead to a sharp drop in UK economic growth.

“If we come back in May and if there’s no deal, no transition, I guarantee the path of GDP in our forecast will be materially lower,” he told MPs.

The committee asked the central bank chief about his position on a potential Brexit delay, as Theresa May bowed to pressure and agreed to give MPs a vote on extending Article 50.

Mr Carney said: “There’s a big difference between an extension of Article 50, even a long extension, and an agreement with a transition to a known end stage.

“Wherever we’re headed, it would serve the economy well to have a transition period to that new world.”