The Bank of England’s chief economist has warned market participants not to dismiss the possibility of a”sharp, Brexit-induced, slowdown” on the UK economy.
Andy Haldane, who was speaking today at an event in Bradford, said the full effect of Brexit had yet to be felt, adding that there are “still enough straws in the wind to believe a sharper slowdown than expected is possible”.
Haldane said the UK central bank had made some allowance for the impact of Brexit on the economy but that this was based on “uncertain” assumptions about the Brexit process “given there are no previous episodes of this type”.
His comments follow the start of formal negotiations on the UK’s withdrawal from the European Union. David Davis, the UK’s Secretary of State for Exiting the EU, is leading the talks while the UK Prime Minister Theresa May attempts to shore up parliamentary support after the June 8 election left the Conservatives with a lower number of seats in parliament.
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Haldane said a disorderly Brexit could result in what he called a “Brexit break” in the economy or a “sharp, Brexit-induced, slowdown”.
He believes the risks of a Brexit break have not disappeared, adding that any unexpected rises in interest rates in the near-term could increase the chances of an “outsized response in spending or in asset prices”.
He said: “Consumers’ spending on houses, cars and household goods have all slowed sharply. It might not take much of a squeeze on consumer demand to induce companies to return to their duvets.”
In the weeks leading up to the election, May had been expected to advocate for a Brexit that took the UK out of the EU’s single market, customs union and the jurisdiction of the European Court of Justice. But the election results have prompted confusion about the government’s Brexit policies and prompted speculation it may push for a less-complete exit from the bloc.
The chief economist’s comments come as the pound dropped below $1.26 before today’s formal opening of parliament. Queen Elizabeth II will set out the government’s agenda in a speech, which comes as the Conservatives are still scrambling to work out a support deal with Northern Ireland’s Democratic Unionist Party.
Haldane also said he was minded to vote for an increase in UK interest rates in the second half of this year, describing a move to withdraw some monetary policy stimulus on that timeframe as “prudent”. He is the latest member of the central bank’s eight-person Monetary Policy Committee, which sets the official interest rate in the UK, to turn hawkish. Rates currently sit at a record low of 0.25% but last week three of the rate-setters voted for rates to go up.
Earlier this week, the Bank announced the London School of Economics professor Silvana Tenreyro will join the MPC for a three-year term in July.