Bank of England Governor Mark Carney believes the bank saved up to 250,000 jobs by unleashing an unprecedented package of monetary stimulus in response to the UK’s Brexit vote.
In a speech at the London School of Economics on Monday — in which he explored the relationship between inflation and economic output — Carney said the bank’s decision in August to cut interest rates to a record low of 0.25% and introduce a new package of quantitative easing had helped safeguard the UK’s labour market from the worst potential impacts of the referendum outcome.
“Suppose the MPC had not responded in this timely, coherent, and comprehensive way. Chart 8 shows that, given the constellation of shocks affecting the economy, opting not to provide monetary stimulus would have meant, in all likelihood, inflation around the target at the two-year point of the forecast, but an output gap of some 1½%, implying around 1/4 million lost jobs. In other words, fully offsetting the persistent effects of sterling’s depreciation on inflation would have required exerting further downward pressure on domestic costs. And that would have meant even more lost output and a total disregard for higher unemployment.”
Here is the chart mentioned in Carney’s text:
The UK’s current unemployment rate stands at a low of just 4.8%, meaning that Britain is technically pretty close to achieving full employment — the point where everybody who wants a job, and is able to work, is employed.
Soon after Britain voted to leave the EU, many predicted that Britain’s unemployment rate would shoot up as a result of the economic downturn that the vote was expected to trigger. In early July for instance, Credit Suisse predicted that Brexit could mean 500,000 Brits losing their jobs.
In their note, reassuringly titled “Mayday! Mayday!” the bank’s UK economics team said that “we can expect the unemployment rate to jump up to 6.5% by the end of 2017.” That translates to around 500,000 more people unemployed.
However, Carney believes that the BoE’s actions in August, at least in part, helped to stave off such consequences, and helped safeguard one of the most crucial parts of the British economy — namely the availability of jobs.
Appearing on stage with Nobel Prize-winning economist Amartya Sen, as well as Lord Nicholas Stern, the chair of LSE’s Grantham Research Institute on Climate Change and the Environment, and a former World Bank chief economist, Carney discussed a wide variety of topics, including the Bank’s policy bias in future.
Carney reiterated the stance he took at the release of last November’s inflation report, saying that the bank could go either way on interest rates, either cutting or hiking as its next move.
“Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target,” he told an audience of LSE students and alumni.
He hinted, however, that the BoE’s next move could be to push interest rates back towards the 0.5% level of August — an interest rate that had been in place for seven years.
Carney also jokingly responded to a question from the audience about the state of the British pound — which has dropped to record lows on fears of a so-called “Hard Brexit” — by saying that sterling can go “up or down.”