Independence could alter course of BoE policy, warn experts

Industry experts are warning that the potential impact of Scottish independence on the UK economy could see the Bank of England pull back on plans for monetary policy tightening and reduce the likelihood of an imminent interest rate rise.

Governor of the Bank of England Mark Carney told the Trade Union Congress yesterday that an increase in the base interest rate was “getting closer.” Carney also warned that the Scottish Government’s proposed plan to share the pound with the UK in a formal currency union would be “incompatible with sovereignity.”

However a number of fund groups and experts from life companies argue that Scottish independence could throw off the Bank of England’s timetable for an interest rate rise and may also prompt a turnaround of the central bank’s monetary policy.

AXA Investment Management has issued a report warning that independence would have a “marked impact on the growth outlook” for the UK, something which is likely to require a re-emphasis on stimulus rather than monetary policy tightening at the Bank of England.

The report forecasts UK GDP will be approximately 0.25 per cent lower than the firm’s central forecast for 2014 and 0.75 per cent lower for 2015.

It says: “A shift of this magnitude would likely push back expectations of a Bank of England monetary policy tightening, have a marked, negative impact on sterling and reduce gilt yields.

“This would impact monetary policy. We would expect the Bank of England’s MPC to respond with a more stimulative stance. Based on previous Bank of England research, the MPC might look to provide additional stimulus to the tune of 1-2% of Bank rate.”

Fidelity Worldwide Investment head of European Equities Paras Anand also expects that irrespective of whether Scotland votes to leave the UK or is granted more devolved powers, the general uncertainty around the country’s future means the risk of an interest rate rise may also have “abated.”

“The uncertainty represented by potential independence (and even the impact of an increased devolution of powers in the case of a ‘No’ vote) will almost certainly hold back the hawks within the Bank of England, so the risks to a fragile recovery represented by a sharp rise in rates has also, I would argue, somewhat abated,” he says.

Aegon UK investment director Nick Dixon argues alternatively that independence could actually serve as a trigger for an interest rate rise if the vote results in a downturn for sterling.

“Mark Carney may have told the TUC today that we should get ready for an interest rate rise, but unless a ‘yes’ vote in Scotland causes a serious shock to Sterling, it’s hard to see this happening before Spring next year,” he adds.Editor’s pick