Bank of England chief economist calls for big post-Brexit stimulus

Over the past month, the outcome of the EU referendum has added another important ingredient to this mix. It has increased materially the degree of uncertainty – economic, policy, and political – around the UK’s economic recovery.15 And while some of this uncertainty may dissipate, a good chunk is likely to linger throughout the Bank’s two to three-year policy horizon. This uncertainty is likely to weigh on domestic spending by both companies and households for the foreseeable future. It is still far too early to be drawing strong conclusions on the precise path of the UK economy from here. At present, we have only the smallest trail of data breadcrumbs on which to base any assessment of how companies and consumers are responding to the referendum news. The Monetary Policy Committee will have a chance to offer its own comprehensive macro-economic assessment in a month’s time, with the August Inflation Report. But let me offer a few general reflections on the likely economic path ahead. First, and in some ways most importantly, this is not (underlined, italicised, capitalised and repeated in bold) a re-run of the financial crisis of 2008/09. Then, the fault-line was an undercapitalised and illiquid banking system which, having folded under pressure, then pulled the credit rug out from under the feet of companies and consumers. When the banks sneezed in 2008, the whole economy caught a cold – and atishoo, atishoo, we all fell down. The situation today could not be more different. The UK banking system is, by an order of magnitude, better capitalised and more liquid than then. That is in large part a reflection of the post-crisis regulatory reform agenda which has strengthened banks’ capital and liquidity standards. Since the referendum, the Bank of England has augmented these capital and liquidity buffers by making available more than £250 billion of liquidity and by lowering banks’ Counter-Cyclical Capital Buffer to facilitate an extra £150 billion of lending. That underlying balance sheet strength has meant, despite some sharp gyrations in their share prices, the cost of UK banks funding themselves has scarcely budged since the referendum. That means the cost of credit to companies and consumers should not be expected to rise either. And nor, with balance sheets strong, is there any reason for banks to constrict credit to customers. This time the credit rug will not be pulled. So while the past few weeks have been a drama, there is no reason to expect this to turn into a crisis, or at least a financial one. Second, even though the economy is unlikely to crash, it is likely to slow, perhaps materially, in the quarters ahead. While companies and consumers might not be slamming on the brakes and going into reverse, as in 2008, some are likely to be going down a few gears, perhaps even moving into neutral. External economists expect the UK economy to tread water over the next few quarters. That means the amount of slack in the UK economy is likely to begin steadily rising in the period ahead, perhaps causing unemployment to rise.

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