The Bank of England is going to rely less heavily on economic data when making interest rate decisions in the future, according to the bank’s deputy governor for monetary policy, Ben Broadbent.
Speaking to The Times, Broadbent argued that the impact of Brexit will be felt in the medium-term, but weakness may not show up in the short-term, meaning that the bank will use its judgment rather than putting all its faith in hard data.
“We have to balance the short-term data against the medium-term outlook,” Broadbent told Times economics editor Philip Aldrick. “When we say data, it’s a broad-term. We know there is an effect coming, we know the world looks potentially very different. We’re pretty confident that the effect of that uncertainty will weigh on investment. It’s difficult, therefore, to weigh those two things.”
After an initial shock, economic data out of the UK since the vote to leave the EU has generally surprised to the upside, with official growth coming in 0.1 percentage points higher than expected for Q2, and most PMI surveys beating expectations substantially.
Broadbent however, argues that the impact of Brexit on the economy will be “insidious” rather than overt, and as a result may take some time to seep into data, making things harder to interpret.
“The lack of clarity about the UK’s future trading relationships needn’t result in visible, headline-grabbing closures of productive capacity,” he said in a speech on Wednesday at an event organised by the Wall Street Journal in London, given on the same day. The Times interview was published.
“The effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed.”
In his interview with The Times, Broadbent denied that recent data is particularly strong saying he “wouldn’t call them objectively strong.” That’s a view shared by most economists, who note that while data has been better than expected, it still points to a marked slowdown in the economy on the horizon.
Moving to a more judgement-based decision system for interest rates and monetary policy, in general would be a big departure from the bank’s recent stance. Since taking over as governor in 2013, Mark Carney has pushed a policy focused on using hard data to make decisions, but it now looks as though the bank is moving back to a slightly more old school way of doing things.
The bank’s MPC cut interest rates to a record low of 0.25% in August, as well as launching a new programme of quantitative easing worth as much as £70 billion. The stimulus package was designed as a bumper to cushion the British economy from the potential negative impacts on the economy caused by the Brexit vote.
The bank’s role is already under the spotlight, following Prime Minister Theresa May’s assertion on Wednesday that “change has got to come” when it comes to UK monetary policy. In her benchmark speech at the Conservative Party conference in Birmingham, May argued that persistently low interest rates and quantitative easing have helped the rich and hindered the poor, and indicated that she will move to change this.
The Bank of England did not immediately respond to a request for comment.