The Bank of England should cut interest rates to provide “insurance” against economic risks next year, according to one of the members of its monetary policy committee who voted to lower borrowing costs in both November and December.
Jonathan Haskel said the economic outlook for the UK had weakened during the last year as Brexit uncertainties had weighed on the economy and the world’s economic outlook had deteriorated.
However, he was speaking after official figures showed that the economy grew slightly faster than previously thought in the third quarter of the year, thanks to a fillip from the Britain’s global trade performance.
Speaking at the Resolution Foundation, Mr Haskel said he believed the current economic data justified looser monetary policy.
“Looking forward, I believe that downside risks are lingering over our forecast,” he said. “Brexit uncertainties may remain entrenched. Brexit is a process not an event.”
Mr Haskel, who joined the MPC in September last year from Imperial College London, voted to cut the Bank rate to 0.5 per cent from 0.75 per cent at its meetings this week and in November.
He said a rate cut would be insurance against growth and inflation slowing down so much that, at that point, cuts in interest rates would not be enough to reverse the situation.
“I think in this context the insurance might be quite cheap,” he said. “We can undo the stimulus by raising interest rates given the much larger policy space we have available in terms of tighter policy.”
He was speaking after the Office for National Statistics revised its estimate for annual GDP growth for the three months to September to 0.4 per cent from 0.3 per cent.
Trade added 2 percentage points to growth reflecting a faster recovery in exports than imports after a Brexit-deadline driven dip in the previous quarter.
Separate balance of payments figures showed that the UK’s trade deficit in goods and services had narrowed by £10.5bn to just £0.4bn in the third quarter.
However, household spending grew by 0.3 per cent rather than 0.4 per cent.
George Brown, UK economist at Investec bank, said a key question was whether consumer spending would continue to soften, although he believed growth would get support from other sources.
“Business investment should begin to recover amid a clearer Brexit path, whereas a significant amount of fiscal stimulus looks set to be unveiled in the Budget early next year,” he said.
In a deluge of official statistics, government borrowing rose in November to a two-year high. Public sector net borrowing in November was £5.6bn, £0.2bn more than in November 2018. This was the highest November borrowing for two years, the ONS said.
This took borrowing for the first half of the financial year to £50.9bn, £5.1bn or 11 per cent higher than in the same period in the 2018/19 fiscal year. The Resolution Foundation said it significantly reduced the room for extra spending and borrowing in the upcoming Budget against both past and future fiscal rules.
“The headroom against the new government’s current balance target has halved,” it said.