The Bank of England’s latest assessment of our economic prospects is little changed from August: growth is a little stronger; in three years time inflation still remains slightly above target, despite the best part of three interest rate rises of 0.25%.
Interest rates remain on hold but anything could happen next. The great unknown is Brexit.
For now the Bank is assuming that Britain makes a smooth transition to a trading relationship with the European Union (EU) that is midway between the favourable terms we enjoy today and a new world of tariff barriers and customs checks, under World Trade Organisation (WTO) rules.
The Bank of England expects clarity on the future with the European Union “to emerge in the relatively near term”.
The details could have a profound impact on the economy and will determine the Bank of England’s next move. As the minutes of the Monetary Policy Committee (MPC) note, interest rates could move “in either direction”.
The Bank makes it clear that “an abrupt and disorderly withdrawal” from the EU would affect the value of the pound as well as both demand and - importantly - supply in the economy.
The Bank argues that disruption at the borders would cause delays - severing supply chains and “severely impairing the productive capacity of UK business”.
As a result, Mark Carney admits “there are scenarios” where prices rise to such an extent that the Bank would increase interest rates, even if the UK were to fall into a recession.
Project Fear? Carney insists not, pointing out that there is the prospect, however unlikely, of a significant “supply shock”. The last time Britain experienced one was during the oil crisis in the 1970s. The US was the target of an oil embargo by OPEC, but the effects of it were felt here too. Inflation and unemployment soared. Workers demanded massive pay rises and the government of the day fell.
Happily, Mark Carney argues that No Deal is “not the most likely outcome” of the current negotiations.
For now, and for what it’s worth, the Bank notes that households are dealing rather well with all the uncertainty. Anyone in work will be benefiting from stronger than expected pay growth. Survey responses suggest pluckiness not panic.
But businesses are getting anxious. The Bank believes that investment has dried up almost entirely. In the absence of clarity, companies are sitting on their hands. The minutes note “little evidence” of stockpiling - partly because it’s so expensive - but suggest it is likely to begin before the end of the year.
The Bank says it hasn’t had time to assess the impact of the chancellor’s Budget. It’s likely to be positive, Philip Hammond gave a lot away.
What’s the probability of “No Deal”? The Bank won’t put a number on it but, in its Inflation Report, does highlight what’s happening to “risk reversal” in financial markets.
More and more people are stumping up money to protect themselves against a sharp fall in the value of the pound. They perceive the risk of No Deal as real and growing.