BoE flags need for more stimulus

Further monetary stimulus will likely be required to mitigate the concequences of Brexit, the bank’s deputy governor says.

Ms Shafik defended the central bank’s response to the Brexit vote. Picture: Getty.

The Bank of England will likely have to provide further stimulus to the UK economy to limit an economic slowdown caused by voters’ decision to leave the European Union, Deputy Governor Minouche Shafik said on Wednesday.

The BoE has already responded to the June vote to exit from the EU by lowering its key interest rate, restarting a program of bond purchases, and providing loans to banks.

But policy makers have also indicated they expect to do more to moderate an anticipated weakening of the economy, and Ms Shafik made it clear she supports that view.

“It seems likely to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious,” she said in a speech at an event hosted by Bloomberg in London.

Recent economic data has been mixed, with a series of surveys suggesting the world’s fifth-biggest economy may be bouncing back from the initial post-referendum slump.

Ms Shafik acknowledged there has been “little data on which to base an assessment of how the outlook had changed,” but said it is clear that the economy will grow more slowly over coming years.

“There is no doubt in my mind that the UK is experiencing a sizable economic shock in the wake of the referendum,” said Ms Shafik, who will leave the BoE in February to run the London School of Economics. “Any reduction in openness or need to reallocate resources will necessarily imply a slower rate of potential growth for the economy.”

Whatever the longer-term implications of the vote, Ms Shafik said the slowdown hasn’t been as “sharp or sudden” as policy makers had feared, and additional stimulus may not be required as soon as they had previously anticipated.

“The likely timing of that stimulus will depend on the continued evolution of the data over the coming weeks and months,” she said. “We will learn a lot from the arrival of more official data for the post-referendum period, and that will allow us to navigate by looking out the window as well as down at our radar.”

The BoE has been criticised by some politicians who supported the decision to leave the EU for exaggerating the likely impact of that decision on economic growth. But Ms Shafik defended the central bank’s response to the vote.

“I’d much rather be on the front foot and react pre-emptively,” she said in response to questions. “I also think what we did helped mitigate the negative shock from the referendum. While the current data has been more favorable, the forward-looking indicators still look quite worrying.”

Asked if the Brexit vote had had any positive consequences for the economy, Ms Shafik responded, “the weather has been really good since the referendum.”

While the BoE has signaled it may lower its key interest rate further from 0.25 per cent, policy makers appear reluctant to follow other European central banks in implementing negative rates.

“The only arguments in their favor are if you don’t have any other option,” said Ms Shafik. “There are a lot of other places I’d prefer to go.”

Dow Jones