Brexit “will force rates up to 3.5pc within 18 months” warns the Bank of England’s (BoE) latest recruit to the Monetary Policy Committee. Michael Saunders. The ex-Citibank economist, who is set to join the rate setting organisation this coming August, believes Brexit will see a collapse in the pound which will lead to a swift hike in inflation.
With the pound devalued, imports will become more expensive, causing inflation to rise. When inflation rises above 2.5%, the BoE will begin to raise interest rates from the historic low of 0.5% and while this will be of joy to savers, mortgage holders will suffer the consequences.
A BoE basic rate of 3.5%, some SEVEN times higher than at present, would see mortgage rates well in excess of 4%
As with all things in the Brexit debate, both sides appear to have equally sound and arguable opinions. Countering the scenario of a 3.5% BoE base rate are those who believe the pound has already devalued against the Euro from its 2015 high of 1.44, to around 1.26 during the first week of May.
This 12.5% fall isn’t quite the 15-20% devaluation predicted by Citibank in February, probably because fears of a ‘Grexit’ are resurfacing for the nth time as the Greeks once again seek to borrow from Peter to pay Paul – a debt which can never ultimately be repaid.
Whilst it’s unclear as to whether the pound-euro rate would change much further on Brexit, given the equally potential negative impact of the UK leaving on the EU currency, the pound would almost certainly devalue against the dollar and other leading world currencies, if only for a short while.
With 47% of the goods we import coming from none EU countries a devaluing of the pound would see inflation rise, the question is by how much?
A small amount of inflation is considered good for an economy and at present the annual rate of 0.5% is way below the target of around 2% set by the BoE. So there is room for inflation following a Brexit, just how much it would be is really anyone’s guess.