Sterling rose and the City’s leading share index closed at its highest level for 11 months after a Bank of England policymaker said a lack of panic since Britain’s shock Brexit vote called into question the need for a knee-jerk cut in interest rates.
Speculation that next month’s meeting of Threadneedle Street’s monetary policy committee would unanimously back a comprehensive package of measures to boost growth was called into question when Martin Weale, one of its nine members, voiced doubts about the need for cheaper borrowing.
Weale, who has been one of the hawkish members of the MPC, said he wanted to weigh up the impact of Brexit on the economy before making up his mind on how to vote.
His remarks made in his last speech as an MPC member came ahead of an expected rise in the annual rate of inflation on Tuesday and as a flurry of reports provided a mixed picture about the prospects for the economy in the aftermath of last month’s referendum.
Weale said the Bank would have to balance the likely reduction in demand against upward pressure on inflation when it makes its decision.
He said: “For there to be a case for easing policy I will need to expect weakness in output to be large enough to compensate for any overshoot in inflation on the assumption that policy is unchanged in the near term.”
Sterling rose after Weale’s remarks at a conference in London, since they were seen as less supportive of action to underpin growth than interventions last week by two other MPC members – Andy Haldane and Gertjan Vlieghe. Haldane called for a big package of measures to support the post-Brexit economy and stressed the need for a prompt and robust response to the uncertainty. Vlieghe was the only MPC member to back a rate cut at the July meeting.
The pound ended the day 0.4% higher against the US dollar at $1.3250 having earlier traded at almost $1.33. The FTSE 100, boosted by the takeover bid for Cambridge-based technology company ARM, ended 26 points higher at 6695, its highest level since August 2015.
Weale said the result of the referendum on 23 June had led to a “very high degree of uncertainty” about the implications of Brexit, and this meant there was a case for waiting to see what the implications might be. Weale added that he thought the short-term impact on demand would be greater than that on the economy’s supply capacity, which would dampen inflation.
In his valedictory speech as an MPC member, Weale rejected two of the arguments used to justify lower borrowing costs.
First, he dismissed the notion that markets would be disappointed were there to be no easing in August, noting that market participants should remember that the MPC sets policy each month, not in advance. “The Old Lady of Threadneedle Street is not a nurse to markets,” he said.
Weale also gave short shrift to the idea that early action was needed to reassure people. “In contrast to the experience of 2008, I do not have any sense that either consumers or businesses are panic-struck and … there have been no material signs of financial panic.”
Manufacturers’ organisation EEF said there had been no immediate impact on trading from the Brexit vote, but said confidence has been dented and companies expected trading conditions over the next six months to weaken.
Most firms surveyed by EEF said order books were unchanged or that it was too early to gauge the effect, but companies were braced for conditions to worsen markedly.
Terry Scuoler, CEO of EEF, said: “Rather than an immediate storm, it is clear that manufacturers see the real risks from the referendum outcome presenting over the next six months to a year. While many are acutely aware that we are still in the early days, exchange rate volatility, political uncertainty and the danger of increased costs are already on their risk radar, and subsequently we can already see confidence starting to drain away.”
The financial services company PwC predicted that UK growth would slow markedly over the winter, but said Britain was likely to avoid the two successive quarters of negative growth that would constitute a recession.
PwC said growth would be cut to around 1.6% in 2016 and 0.6% in 2017, but should gradually recover thereafter as the initial shock from the Brexit vote fades. UK house price growth was expected to decelerate to around 3% in 2016 and around 1% in 2017, but the company said there would be no major house price crash.
John Hawksworth, chief economist at PwC, said: “The Bank of England has already taken action to steady the ship, however, and we do not expect the post-Brexit economic downturn to be anything like as severe as that following the global financial crisis of 2008-9 or indeed the deep recession of the early 1980s.
“Our main scenario projections suggests that the UK should narrowly avoid a recession over the next year, although we recognise that risks are weighted somewhat to the downside at present.”
The online jobs site reed.co.uk said employment had been holding up since the Brexit vote. It said the number of new jobs was up 8% on the same period in 2015, with 83% of companies saying they would not be freezing recruitment.