Bank of England deputy governor Ben Broadbent has warned over the damaging impact of further Brexit delays as Britain faces the longest run of falling business investment since the Second World War.
Speaking to the Press Association, Mr Broadbent said pushing back the Brexit deadline has left firms in limbo over investment decisions and major projects.
He said business investment has already been “feeling the consequences” and cautioned that delaying Brexit further means prolonging the uncertainty for hamstrung companies and risks hitting the wider economy.
The deputy governor for monetary policy, who sits on the Bank’s interest rate setting committee, also sought to assure borrowers that any interest rate hikes would be “gradual” after Governor Mark Carney said last week that increases would need to be “more frequent” than financial markets expect.
His comments come as Britain’s EU withdrawal deal remains elusive, with hopes of any progress in cross-party talks fading fast.
Mr Broadbent said: “It’s pretty clear that investment has been feeling the consequences of the uncertainty about Brexit and particularly the possibility of a bad outcome.”
He said it “makes sense for firms to wait for news if they expect the news to come soon”.
“If you continually expect news to arrive imminently – a resolution – then that can have quite a depressing effect on investment,” he added.
The Bank’s latest set of forecasts last week showed that the UK is heading for the longest run of falling investment in the post-war era, having already declined for four quarters in a row.
If this continues indefinitely, it could spell bad news for the economy, said Mr Broadbent.
“We rely on investment for making us collectively more productive and better off. That’s clear,” he said.
But assuming a deal is struck, the Bank is forecasting a surge in pent up spending.
“We think there would be quite a strong bounce-back in investment,” said Mr Broadbent.
“These are not cancelled projects – it’s delay.
“If, as a business person, you’re assured that the worst thing is suddenly off the table, that has quite a powerful effect on your incentive to invest.”
Despite this rebound, the Bank is still forecasting business investment in three years’ time to be far short of the level the UK was at and “miles behind” forecasts before the EU referendum shock, according to Mr Broadbent.
One positive side-effect of the business investment woes has been that firms have instead decided to hire staff rather than spend.
This has boosted UK employment and ultimately consumer spending, which has been helping offset the drop in business investment.
In its latest inflation report, the Bank hiked its growth forecast to 1.5% this year, with an improved outlook for both 2020 and 2021.
But this was largely thanks to a more stable global economic outlook and the fact markets have trimmed expectations for interest rate rises on these shores and internationally.
Mr Carney said on presenting the Bank’s quarterly inflation report that financial market expectations that a hike will not come until the end of 2021 would not be enough to keep inflation to the 2% target, though he repeated the Bank’s “limited and gradual” mantra.
Mr Broadbent stressed the “emphasis is on the ‘gradual’ bit of limited and gradual” in a sign that borrowers should not expect a flurry of rises.
It is guidance that is also based heavily on the assumption that the UK will strike a Brexit deal with a lengthy transition period.
If there was a “more messy” no-deal outcome, the response from the Monetary Policy Committee (MPC) is far from certain, said Mr Broadbent.
He has opted not to join some of his colleagues on the MPC in signalling which way he would be inclined to vote in response to a no-deal.
“I don’t know. I really don’t, because I don’t know how much the exchange rate will move,” he said.
The Bank has argued it is that possible rates – currently at 0.75% – could rise in the event of a no-deal, if the pound crashes and sends inflation soaring, though most experts believe a cut would be far more realistic to ward off economic doom.
On the subject of Mr Carney’s successor, Mr Broadbent has remained coy, insisting he is undecided on whether or not to apply for the top job before the June 5 deadline.
Asked why, he said: “It’s a big job.”
“I have lots of things to think about before I make that decision.”
But he paid tribute to the outgoing Governor, who leaves in January, and his “extraordinary energy”.
He said: “He’s been a fantastic Governor and servant of the bank and public policy – and to this country.”
“He’s done many things to improve and modernise the institution – it’s a more accountable place and a more open place and a more diverse institution than it’s ever been.”