There may be no way to avoid easing of monetary policy following Brexit, but some say it requires a more gradual approach [Xinhua]
A week after the Bank of England cut interest rates and began a stimulus program of quantitative easing to spur the economy, there is growing debate that it should back away from too quick an intervention.
When the BoE met in mid-July for the first time since the Brexit referendum, it decided to hold off on cutting interest rates until it could further explore the impact of Britain’s exit from the European Union.
At the time, however, many analysts predicted that the BoE would eventually resort to lowering the interest rate and (re)initiating quantitative easing much as the Federal Reserve did in the US in 2009.
In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.
The Fed launched a bond buy-back stimulus mechanism (Quantitative Easing) capped at $85 billion since 2009 in a bid to keep markets growing. As the unemployment levels fell and market prospects improved, the Fed began tapering its stimulus fund and terminated it in late summer 2014.
While acknowledging that there could be more rate cuts in the months ahead, BoE policymaker Ian McCafferty said in a column in The Times Tuesday that there should be a “more gradual” approach to quantitative easing because he feared a rise in inflation.
It’s been seven weeks since Britain voted to leave the European Union and some analysts prefer caution in the interim as the long-term economic effects of the exit become clearer.
“Our current forecast is surrounded by a much higher degree of uncertainty than normal,” he wrote in The Times.
In the absence of hard economic data, markets have relied on surveys – often negative speculation – to forecast the UK’s economic prospects.
For example, a Lloyds Bank survey on Monday found that manufacturing output fell in July. Its Purchasing Managers Index, which is an indicator of manufacturing activity, dropped to 47.4 in July from 52.5 in June.
The reading is below the neutral 50-point level; a reading above 50 indicates expansion, while a reading below 50 represents contraction.
The BRICS Post with inputs from Agencies
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