IN the end, the Bank of England had no choice. Every economic warning sign is flashing; output across the services, manufacturing and construction sectors has fallen at the fastest rate since the last recession; the pound has plunged; and we are all staring into the headlights of an oncoming recession. What else could the Bank of England do but cut interest rates from 0.5 per cent to the record low of 0.25 per cent?
Mark Carney announced the decision with all his usual assurance and insisted the UK economy can handle change, but the outlook remains profoundly gloomy: unemployment is expected to rise, as will inflation, house prices will decline and the growth in real wages will slow. The Bank of England has also taken its growth predictions perilously close to the cliff of zero per cent – it had predicted growth for 2017 of 2.3 per cent but has now adjusted that down to 0.8 per cent.
The saddest part is that all of this could have been avoided. During the referendum debate, the Brexiteers recklessly talked down the warnings of the economic consequences of leaving the EU as “Project Fear”. But now here we are facing the economic reality of their campaign and the risk of recession - Project Fear, it turns out, was Project Fact and the crisis is happening. The only hope is that in years to come the Brexiteers who took us to this point will be held to account.
In the meantime, the Bank of England has been left to make the best of a bad situation and has responded, as it had to, with its interest rate cut. It will also buy £60bn of UK government bonds and £10bn of corporate bonds as well as introduce a new Term Funding Scheme, which will lend directly to the banks at rates close to 0.25 per cent to encourage them to keep on leading.
Mr Carney himself recognised that there is only so much the Bank of England can do to offset the economic impact of a large structural shock such as Brexit, but believes his package of measures will at least offer some support during a period of grave uncertainty. There will be losers – savings are now worth virtually nothing, there will also be a serious impact on pensions, particularly final salary pensions whose deficits will increase, and we are close to the point where small businesses will be charged for putting any money away.
Whether such pain will be worth it depends on whether the Bank of England’s measures work, and that is extremely uncertain. One problem is that the uncertainty caused by the Brexit negotiations will drag on for years which could mean that people remain unwilling to spend or take on debt whatever the inducements from the Bank of England; the other concern must be that pumping more money into the economy could ultimately replace one problem with another by encouraging inflation.
And once the UK does actually move into Brexit, the downward pressures on the economy will only get worse. EU subsidies will disappear; British businesses will also be forced to live in the new post-EU world where the costs will be high – only this week, The Scotch Whisky Association said leaving the EU would increase trade tariffs by as much as 20 per cent.
As usual, the Brexiteers react to such warnings with their customary bravado and dismiss anyone who warns about the economic consequences as “doing down Britain” and there be others who will only see the up sides of the emergency measures – the cheaper cost of mortgages for example. However, in the years to come, whether the Bank of England’s measures work or not, those reckless Brexiteers who said everything will be fine will have to face one question from businesses, savers and workers: so, are we really better off? Right now, it seems extremely unlikely that the answer will ever be yes.
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