Interest rates would need to rise faster if there is a smooth Brexit

THE BANK of England would probably need to raise interest rates faster than investors expect if Britain manages a smooth exit from the European Union, though Brexit’s implications for the central bank remain unclear, rate-setter Michael Saunders, said.

Britain is due to leave the EU in little more than four months’ time and Prime Minister Theresa May is struggling to get her Conservative Party behind the withdrawal deal she has hammered out with Brussels.

Mr Saunders said a Brexit deal would boost Britain’s economy and probably justify further increases in rates.

“My own hunch is that, conditioned on our Brexit assumptions, capacity pressures will probably build somewhat faster than envisaged in our latest Inflation Report projections, reinforcing upward pressure on pay growth,” he said in a speech to business leaders. He added: “In this case, we would probably need to return to something like a neutral stance rather earlier than implied by the current yield curve.”

Financial markets only fully price in the possibility of the next Bank of England rate hike for the end of 2019.

Mr Saunders was one of Bank of England’s earliest advocates for its gradual push to raise borrowing costs away from their alltime lows, which started in November last year. However, he warned it was hard to be sure that higher rates would be needed in the event of a smooth Brexit because the inflation pressure from stronger economic growth could be offset by the disinflationary effects of a rise in sterling.

He added that it was also hard to tell what the Bank of England would need to do if Britain left the EU with no transition deal.