Pound plunges after Bank of England policymaker signals rate cut

Michael Saunders, Member of the Monetary Policy Committee, Bank of England, appearing before Treasury Select Committee at the House of Commons, London to answer questions on the Bank of England Inflation Reports.
Michael Saunders, a member of the Bank of England's monetary policy committee. Photo: PA

The pound on Friday plunged sharply after a Bank of England policymaker said he thought it possible that interest rates would be cut even if the UK avoided a no-deal Brexit.

Michael Saunders, an external member of the bank’s rate-setting committee, said that he thought it was “quite plausible that the next move in bank rate would be down rather than up.”

The Bank of England has continually signalled that it plans to increase interest rates, in part because the assumption of a smooth Brexit is built into its forecasts.

It has nevertheless acknowledged that rates could go either way if the UK crashes out of the EU.

The pound declined by around 0.4% against the dollar (GBPUSD=X) on Friday, falling below $1.23 for the first time since earlier this month.

Speaking to a chamber of commerce in Barnsley, Saunders said it was “perhaps more likely” that there could be “prolonged high Brexit uncertainty” even if a no-deal Brexit does not occur.

Rates might have to fall in part because economic growth in the UK has been “considerably weaker” than the bank’s monetary policy committee expected, he said.

Noting that the first half of the year was the weakest since 2009, Saunders said economic data suggested the third quarter of 2019 would be “similarly sluggish”.

The pound fell below $1.23 for the first time since early September. Chart: Yahoo Finance
The pound fell below $1.23 for the first time since early September. Chart: Yahoo Finance

In the case of prolonged Brexit uncertainty, he said it “might well be appropriate to maintain a highly accommodative monetary policy stance for an extended period and perhaps to loosen policy at some stage.”

This could see the Bank of England cut interest rates and introduce stimulus measures, like its counterparts in the US and EU.

He also cautioned against deferring interest rate adjustments until the nature of Brexit became clear, saying that it could result in the bank drifting away from the “appropriate policy stance.”

“In general, I would prefer to be nimble, adjusting policy if it appears necessary to keep the economy on track, and accepting that it may be necessary to change course if the outlook changes significantly.”

Because Saunders’ comments run counter to what the Bank of England has signalled, they will bolster those who are questioning its policy stance.

“In making the case for a cut now it conforms to the belief in many in the market that the bank is barking up the wrong tree with its slight tightening bias in its forward guidance,” said Neil Wilson, chief market analyst at Markets.com, in a note.