Bank of England deputy governor Sir Dave Ramsden has revealed he has a gloomier outlook on UK growth than his rate-setting colleagues, as he warned Brexit is set to weigh on the economy for some time.
In a speech to the Inverness Chamber of Commerce, Sir Dave said even if a Brexit deal is reached, he believes growth will not rebound as strongly as the Bank has forecast.
He believes business investment, which has slumped for a year now, is not set to recover as sharply as currently predicted by the Bank, while productivity will also remain low.
But he said that, in the event of a smooth transition, interest rates would need to rise to keep inflation to target.
He said: “If we get a smooth Brexit with a transition deal, as assumed in the Monetary Policy Committee’s latest inflation report forecast, I expect growth to pick up, leading to excess demand and building domestic inflationary pressure, so that further monetary tightening is appropriate to maintain monetary stability.
“Relative to the best collective judgment expressed in the MPC’s central forecast, I am, as I have set out in my talk today, a little more pessimistic on GDP (gross domestic product) growth than my colleagues on the MPC.”
He added that a no-deal, so-called cliff-edge Brexit would have “large negative economic effects”.
He said businesses would continue to hold back on spending until uncertainty clears, with no imminent sign of resolution adding to the pressure on growth.
“We are unlikely to achieve full certainty until the final outcome of negotiations is known, and there is a risk that more persistent uncertainty could push out the pick-up in investment and continue to drag on growth,” he warned.
Sir Dave said he could not say how the MPC should respond in the case of a no-deal, disruptive Brexit, as it would depend on the reaction of the pound and other factors.
He added: “There are scenarios where the balance of those factors would mean looser monetary policy was appropriate, and other scenarios where it would be appropriate to tighten.
“In other words, the response would not be automatic and could go either way: rates could go up or down as the situation demands.”
The Bank recently increased forecasts for UK growth, to 1.5% this year, up from the paltry 1.2% predicted in February thanks largely to a more stable global economic outlook.
It also increased its growth outlook to 1.6% in 2020 and 2.1% in 2021, up from 1.5% and 1.9% previously.