Outgoing Bank of England deputy lifts lid on Brexit response


The outgoing deputy governor of the Bank of England has defended its response to the the UK’s vote to leave the European Union and says more stimulus is on the way – even though the economic slowdown following the Brexit referendum has not been as “sharp or sudden” as expected.

Speaking at a Bloomberg summit, Minouche Shafik, who is leaving the Bank in February to head the London School of Economics, also discussed the “eerily calm atmosphere” at the Bank on the day following the vote.

The Bank recently upgraded its estimate for UK GDP growth in Q3 from 0.1 per cent to 0.3 per cent, which it had forecast in August.

Shafik says the Bank was faced with two challenges following the Brexit vote: a lack of data on how the outlook had changed and rates already being at a very low level.

At its August meeting, the Bank dropped rates to 0.25 per cent, boosted gilt purchases by £60bn, initiated £10bn in corporate bond buying purchases, and established the Term Funding Scheme (TFS).

“It seems to me that further monetary stimulus will be required at some point in order to help ensure that a slowdown in economic activity doesn’t turn into something more pernicious,” Shafik says.

“The likely timing of that stimulus will depend on the continued evolution of the data over the coming weeks and months.”

Shafik also says the day after the referendum was “remarkably orderly”, which she attributed to contingency planning co-ordinated with the PRA.

“I arrived in a dealing room in the very early hours of the 24th of June to witness astoundingly large volumes go through the foreign exchange market in a remarkably orderly fashion as sterling found its new level – many banks and trading platforms reported turnover that was up to 10 times the typical daily amount.

“I went through a series of pre-scheduled conference calls and meetings with market participants and counterparts in the international system which had an eerily calm atmosphere as the immediate risks we had most feared – thankfully – did not materialise.”

Shafik adds that the depreciation of the pound is “certainly helping the economy find a new equilibrium”.

Responding to criticism that banks do not pass monetary stimulus on to the real economy, Shafik says that that was why the monetary policy committee introduced the TFS, with initial signals suggesting banks are passing rates on to customers.

Shafik defends the impact of low interest rates on pension funds and insurance companies, stating that stable economic growth that monetary policy supports is essential for these investors to meet their long-term liabilities.

She adds that the corporate bond buying scheme, which began this week, has been designed to give a “broad and representative” range of issuers and sectors.