BOE’s Tenreyro rules nothing out on interest rates in Brexit era

Bloomberg

Bank of England official Silvana Tenreyro said two more interest-rate increases will probably be needed to get inflation back
to target, but Brexit will be the real determinant of where policy goes next.
Less than a month after the first rate hike in a decade, Tenreyro’s comments reinforce the view of other Monetary Policy Committee members that the path over the next three years isn’t set in stone.
While inflation is above the BOE’s 2 percent goal, how the exit from the European Union filters through the economy and hits migration, investment and trade remains unknown.
“Brexit will likely affect the supply side of the economy,” Tenreyro, 44, said. “We don’t know how the demand side will respond. It depends on how households and companies react to the new normal, to the new potential. Shocks can hit the economy one way or the other and we will have to respond to that.”
Governor Mark Carney and his deputy Ben Broadbent have said in recent weeks that Brexit could prompt a policy move in either direction. Dave Ramsden, who voted against this month’s tightening, said that leaving the EU will lead to a long period of sluggish growth in the UK Markets are currently fully pricing in another 25 basis-point rate increase for November 2018.

‘MODEST’ GROWTH
In her first interview since joining the MPC in July, Tenreyro said that economic growth will be “modest” over the BOE’s
forecast horizon. With weak
productivity undermining the economy’s potential, even that will be enough to fuel domestic inflation pressures.
That’s one of the reasons, along with what she says are signs of a wage-growth pickup, that led her to support the November interest-rate increase. Tenreyro had voted to keep the benchmark rate at a record-low 0.25 percent at her first two meetings.
But the next step isn’t a given. “People up until recently thought that Brexit meant monetary policy would remain highly accommodative and interest rates would stay low forever,” she said. “But Brexit might present other challenges that require the opposite. It might require an adjustment either way, and it’s not obvious. That’s something to be prepared for.”
Britain is due to leave the EU in March 2019, but there’s little clarity as yet on the new relationship with the bloc or the nature of any transition deal. The BOE’s forecasts are based on an average of various scenarios and aren’t being adapted to every twist and turn in the negotiations.