Has Mark Carney Reversed the Brexit Recession?

Bank of England Governor Mark Carney defended the fresh round of quantitative easing to politicians this week, saying policymaker reaction will help the UK “make a success of Brexit”.

Speaking to MPs on the Treasury Select Committee this week, Carney said the stimulus package introduced in August, which consisted of an interest cut to a new record low of 0.25% and a £70 billion quantitative easing programme, is helping to stabilise property prices and the economy.

Carney faced criticism from Brexit supporters for saying the economy would be forced into recession in the event of a Brexit vote. However, consumer confidence and manufacturing surveys since June have suggested that the UK economy is in good shape.

Carney denied that the Bank had “over-egged” their warnings on Brexit. He added that the policymaker reaction “cushioned” impact of the vote on the economy.

Magdalena Polan, economist at Legal & General said this week she expected Carney would stick to his word and not let the Bank of England lower the base rate below zero into negative rate territory.

Polan added that the stimulus package was an “emergency measure” and that there is “low probability” of negative interest rate in the UK.

European Central Bank Unchanged

Also this week, the European Central Bank held its main interest rate at 0%. Mario Draghi, President of the ECB said the committee had not discussed extending quantitative easing or alternative stimulus measures thanks to the positive outlook of the Eurozone.

“Draghi’s comments came as a further sign that he is employing the ‘wait and see’ approach and most likely waiting for the Federal Reserve to move first before wading into further action,” Ana Thaker, market economist at PhilipCapital UK said.

Anthony Doyle, investment director at M&G retail fixed interest added that he believes the European Central Bank will look to expand its asset purchase programme before the end of 2016.

“With an annual inflation reading of only 0.2% in August, the European economy remains dangerously close to entering into a deflationary environment,” Doyle said, “On the growth front, the UK’s decision to trigger Article 50 will act as a headwind to economic growth, potentially denting business and consumer confidence in the short term. In order to support the Euro area economy, the ECB will be forced to take an even easier stance on monetary policy.”

Salman Ahmed, chief investment strategist at Lombard Odier pitched in, saying that the ECB’s decision would push global bond yields and the euro currency higher.

Is Central Policy Fiscal Stimulus Still Effective?

The effectiveness of global central bank monetary policy has been called into question, in particular negative interest rates.

“Global growth has remained sub-par. Inflation expectations have been hovering near historical low, especially in the developed economies, and well below targets set by central banks,” said Polan.

“There is a limit to monetary policy’s ability to revive growth and stoke inflation following the global financial crisis.”

Dr Mark Mobius, executive chairman at Templeton Emerging Markets agreed, saying negative interest rates are not effectively boosting investor confidence.

“Negative rates are shrinking bank profit margins and thus, making them reluctant to lend,” he said. “The lack of interest earnings make people who are not able to invest the money elsewhere feel that they are financially disadvantaged.

“The global economy is not roaring ahead despite the huge money-printing taking place and the extremely low interest rates in the major economies.”

Under such unconventional and indirect measures, confidence tends to worsen and business leaders develop a reluctance to move forward and invest – the opposite of what these efforts intend, prolonging the economic slowdown.

Polan said instead, fiscal easing – more government and public spending – would support economic output directly in the short term by increasing demand.