Impact of post-Brexit uncertainty overstated, says MPC hawk

The degree to which uncertainty will hit the British economy has been overstated, says Kristin Forbes, a member of the Bank of England’s Monetary Policy Committee.

In a speech, Ms Forbes, one of the most hawkish members of the interest rate-setting committee, described uncertainty as the “modern equivalent of a whipping boy”.

Ms Forbes took aim at excess pessimism about the UK economy based on the idea the EU referendum result had injected a heavy dose of uncertainty. “Despite this heightened discussion about uncertainty, UK economic performance has been solid,” she told a London conference.

Economic growth for the third quarter came in at 0.5 per cent, according to the first estimate from the Office for National Statistics, and the BoE revised up its own 2017 growth forecasts in the November inflation report.

Ms Forbes was contributing to a debate among economists about why the economy has performed better than expected since the June 23 vote to leave the EU. At issue is why a gap has opened between upbeat consumers and downbeat financial markets while the pound plunged in value against the dollar but domestic consumption and retail sales were strong.

“Just as the whipping boy of the 15th and 16th centuries was not always irrelevant to his punishment, however, UK earnings and the broader economy are not unaffected by the uncertainty at hand,” she said. Instead the key question is “how much?”

The speech included private forecasts made by Ms Forbes at the August MPC meeting that assumed consumption growth remained at the same rate as the average over the previous year but uncertainty would still have a big impact on investment decisions.

While her forecasts still underestimated growth she said it did so by a “lesser degree” than in the collective forecast made by the MPC in August and “better captured the shallower slowdown that is now widely expected”.

Media attention and dispersion in forecasts of economic growth were the main drivers of an increase in measured uncertainty, she said, but tended to have “smaller effects on the broader economy”.

“Adjusting uncertainty measures to reduce the importance of these less informative components suggests a smaller drag on growth from the recent increase in uncertainty,” she said.

Heightened uncertainty normally raises the cost of borrowing as banks and investors demand greater compensation for added risk, she said, but since the vote consumers and business have continued to enjoy easy access to cash.

There was little sign yet of uncertainty working as a drag on the economy but it could slow business investment, leading to lower productivity, wages and consumption.

Ms Forbes was one of the three MPC members to opt against increasing BoE purchases of government bonds at the August meeting.

In her speech she said lower uncertainty would mean less of an increase in unemployment. As monetary policy must be a trade-off between higher inflation and higher unemployment, this would give the BoE less reason to tolerate price rises without tightening monetary policy.

“The bottom line is that the path for uncertainty is central to the trade-off facing the MPC today,” she added.