MPC’s Vlieghe: Brexit should have meant immediate rate cuts


The only member of the Bank of England’s monetary policy committee to vote in favour of an interest rate cut last week has defended his decision saying the neutral rate of interest has fallen.

Last week, the MPC surprised markets by deciding to keep the interest rate at 0.5 per cent, voting 8-1 in favour of no action on rates or quantitative easing.

Writing in the Financial Times, Gertjan Vlieghe, who wanted to cut rates to 0.25 per cent, says the only reason to keep rates on hold for the last few months was to see if the economic slowdown seen in H1 was due to uncertainty in the lead up to Brexit.

The UK economy had been growing at a rate of more 3 per cent in 2014 compared to less than 2 per cent in H1.

Now that the UK has voted to leave the European Union, Vlieghe says he favours an immediate rate cut followed by a “package of additional measures” in August.

Vlieghe argues: “We have not been providing as much stimulus as you might think, because interest rates are not all that far below this lower neutral level.

“Debt deleveraging, changing demographics and a widening of the income distribution across the population might be some of the factors behind this low interest rate environment, and these factors are likely to persist for years.”

Vlieghe says while the lower currency rate is likely to push up inflation over the next couple of years, in the longer term inflation expectations have fallen lower since the referendum.

In a statement accompanying last week’s interest rate decision, the MPC said most members expected monetary policy to loosen in August.