Tuesday 17 July 2018

Brexit unknowns leave a question mark over decision

Sterling has been kept weak to offet the effects of Brexit
Sterling has been kept weak to offet the effects of Brexit
Donal O'Donovan

Donal O'Donovan

When interest rates rise borrowing becomes more painful, and the rewards for savers are boosted. That tends to be done to dampen down economic giddiness, so lifting interest rates is generally a positive signal.

Interest rates have been at historic lows across the developed world since the great crash.

The Bank of England, which yesterday raised interest rates for the first time since 2007, isn't even an outlier - borrowing costs in the Eurozone are theoretically even lower.

But yesterday's move comes at an extraordinarily delicate time for the UK economy.

Brits are suffering from higher living costs because the pound has been kept weak to counter the fallout from Brexit. But that in turn is inflating the price of imports, including food and fuel.

A rate rise - which checks the supply of sterling - would normally reverse inflation. But the elephant in the room is still Brexit.

The question is whether raising interest rates now could worsen the impact of the decision to leave the EU. Economist Paul MacFlynn at the Nevin Institute thinks it will.

"Back in August 2016 the bank cut interest rates in response to the uncertainty created by the vote to leave the EU," he said.

"If anything, Brexit uncertainty has only increased since then, so either the bank were wrong then or they are wrong now." However, Esmond Birnie, senior economist, Ulster University Economic Policy Centre, says that the BoE has taken the view that Brexit means the potential for growth in the UK economy is less than it was.

This means that the rate of economic growth at which inflation - which hurts consumers - begins to take off has also been reduced, bringing forward the need to lift rates.

Read more: BoE interest rate up for first time in a decade but pound falls

Irish Independent

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