The outlook for the U.K. economy has deteriorated amid the global trade war and Brexit uncertainty, strengthening the case for monetary policy easing rather than tightening, Bank of England's Gertjan Vlieghe said in a speech at London.
"While Brexit-related stockbuilding and other temporary factors are causing significant volatility in quarterly GDP growth, a range of other activity indicators suggest the underlying growth rate of the economy is now close to zero, with business investment declining outright and consumption growth slowing," the policymaker said. In such a situation, any monetary policy tightening would be slower than expected, he said.
Vlieghe said that the nature of Brexit and global economic growth are significant determinants of the economy's outlook and the central bank's monetary policy.
Taking into account the current scenario, he expects three possible scenarios in the economy. A near-term Brexit agreement would stimulate investment growth and lessen ongoing uncertainty, preventing the need for monetary policy easing and paving way for "gradual and limited" rate hikes eventually.
A situation of "entrenched Brexit uncertainty" would keep economic growth subdued, increasing the need for monetary stimulus. A hard Brexit situation would more likely require monetary stimulus than tightening albeit the direction for interest rates is not automatic, the policymaker said.
In either scenario, the central bank would work to bring inflation closer to its 2% target while stimulating growth and increasing employment, Vlieghe said. The U.K.'s monthly GDP contracted in August while September's unemployment rate unexpectedly increased.
Vlieghe's comments seemed to contradict recent comments from Deputy Governor Dave Ramsden, who believes that entrenched Brexit uncertainty would hinder the BoE from further easing. Meanwhile, Jon Cunliffe, deputy governor for financial stability, cautioned Oct. 14 that a prolonged low-interest-rate environment would make economic downturns more severe.
The BoE's next meeting is scheduled for Nov. 7.