The Bank turns bullish on Brexit

Nick Hubble

The Bank of England (BoE) raised interest rates by 0.25% last week. It was an unanimous decision by all nine members of the committee.

The Telegraph called it the second rate hike in a decade, but the first real one. After the Brexit referendum panic failed to materialise in 2016, the BoE reversed its cut. Yesterday was the real thing – a proper rate hike aimed at slowing inflation.

The newspaper coverage of the policy decision was a muddle. The Telegraph came to three contradictory comments on a single day:

“An increase in base rate should provide a boost to savers as banks pass on the higher rate through interest paid on accounts, while borrowers can expect to pay more for mortgages and loans as a result.”

“As for mortgages, most providers priced in the anticipated May rate hike that never came, so there is unlikely to be a sudden shift in costs.”

“Britain’s biggest banks are under fire after announcing plans to hit homeowners with interest rate hikes from Friday while failing to pass on higher rates to savers.”

Based on that, I have no clue what the net effect of yesterday’s monetary policy might be.

In the end, inflation is still running well ahead of interest rates. Savers and bond investors are going backwards and paying taxes for the pleasure.

The papers also can’t agree about what’s going on in Britain’s households.

The Independent writes “households have even paid down some of their gigantic debts.” While the Telegraph says the opposite: “It comes after recent figures showed the UK has become a nation of borrowers. Households are in the red for the first time since the Lawson spending boom of the late 1980s.”

The currency market couldn’t agree about the interest rate hike either. First the pound spiked. Then it slid almost a whole per cent.

At least the market action makes sense when you think about it. Interest rate hikes look less likely in the next few quarters according to BoE comments. Whereas yesterday’s hike was already priced in. The net effect is to make the pound less attractive.

But Brexit is coming! How can the BoE hike rates with such an impending calamity

Carney is an expert on (taking) credit

In his comments, BoE governor Mark Carney “played down concerns that Brexit may be disorderly,” according to Bloomberg.

Ever since doing a deal with the Treasury for more BoE autonomy, Carney has abandoned his Brexit gloom. He’s now supportive of the government. Brexit and all.

But talk is cheap. The last two rate hikes are the real confirmation that Carney thinks Brexit is all tip and no iceberg. Otherwise he wouldn’t tighten.

Despite demonstrating he does not actually fear Brexit with the only thing that matters – policy decisions – Carney did have some other things to say about leaving the EU.

Somehow, Carney managed to take credit for being wrong about Brexit gloom.

According to the governor, the BoE rescued Britain from its own miserable Brexit forecast by lowering interest rates by 0.25% in the aftermath of the referendum.

Taking credit for preventing something that you forecast seems a little shifty to me…

Now, with a no-deal Brexit looking more likely than ever, Carney is optimistic enough to raise rates!

Not so long ago he told us that the lack of a Brexit crash was down to the fact that Brexit hasn’t happened yet…

Now that it’s set to happen, he’s tightening monetary policy!

Here’s how an opinion piece at the Independent put it:

We have, then, gone from one extreme to t’other. Before the 2016 referendum, arguably, the Bank was too gloomy and participated too enthusiastically in so-called Project Fear.

Now, scorched by the experience of being mauled by the bad boys of Brexit, governor Carney shies away from the reality of a cliff edge that is growing ever closer. We are talking about stockpiling tins of tuna, for heaven’s sakes.

Yet the governor of the Bank merely smiles when asked to identify the things they’d do to ensure financial stability and support the economy, if and when the recession he told us so confidently back in 2016 would accompany Brexit does indeed descend on us – but worse than anyone could have predicted.”

Our central bank governor is behaving like a politician. Politicising central banking is immensely dangerous.

Monetary policy in a real Brexit

We shouldn’t just dismiss Brexit warnings. The potential for the UK government to foul things up somehow is high.

Remember, we are not “taking back power”, we are assigning it from one bundle of politicians to another. The EU is famously hamstrung on most policy issues. Which I consider to be a good thing.

If the wrong sorts of politicians start to run Britain, and we empower them, it’s a recipe for disaster. Yes, worse than being in the EU.

If Brexit does unfold badly, the likely path for interest rates has economists divided. Will the BoE have to hike rates to fend off a crashing pound, or lower rates to help an ailing economy?

Once again, the Telegraph has itself in a bit of a muddle: “Interest rates may have to rise to curb a slowing economy if Britain leaves the EU.”

The Brexit fudge is good news

Carney isn’t the only one who has changed his tune on Brexit. Ever since a no-deal Brexit appeared on the table, one European nation after another has backed UK proposals.

An EU diplomat told the Daily Express, “Michel Barnier is still the EU27’s chief negotiator but his negotiating guidelines set by heads of state can change under pressure from Prime Minister May.”

Donald Trump-style negotiation tactics seem to be working. The genuine threat to walk away from the table is finally having an effect.

But it isn’t a proper deal that negotiators are working towards. It’s something called the Brexit fudge. The media and Remainers bemoan it as a sort of purgatory. And they’re right to be worried.

The interesting thing about the Brexit fudge is that it’s incredibly difficult to oppose politically.

For months I’ve been explaining that any particular Brexit deal will be unpopular. Brexit may have won the referendum, but the specific Brexit we favour varies greatly. No one version of Brexit will have an election winning level of support.

Well, Prime Minister Theresa May has found a solution. A vague Brexit can’t be criticised effectively because it doesn’t decide much. But it is a Brexit.

The fudge also delays decision making, which is ideal as the EU continues to implode.

Sweden’s eurosceptic party is shaping up to be the kingmaker next month.

In Germany, the upstart Alternative for Germany party (AfD) is polling just 1% behind the establishment Social Democratic party (SPD). The election winning Christian Democratic Union (CDU)/Christian Social Union (CSU) combination is at an all-time record low.

Brexit may yet prove to be a sideshow in the story of the EU.

Until next time,

Nick Hubble
Capital & Conflict

Category: Brexit

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