Britain’s new chancellor of the exchequer and its central bank governor will spend the summer thrashing out a co-ordinated plan to restore confidence to households and business in the wake of the vote to leave the EU in a bid to prevent the economy sliding into recession.
Philip Hammond’s pledge to work with Bank of England chief Mark Carney came shortly before the central bank announced it would pause for a few more weeks before taking action in August to provide monetary stimulus to the economy.
With interest rates already close to zero, any boost to economic growth amid Brexit-related uncertainty is likely to need co-ordinated action by the central bank alongside lower taxes and some mitigation of the planned cuts to public spending.
In his first full day as chancellor, Mr Hammond made concerted efforts to reassure companies that the new government would “do whatever is necessary to keep the economy on track”.
As he met Mr Carney on Thursday morning, he said that the Treasury had evidence of business investment decisions “being paused” and he wanted to reassure companies that the government would take a “pragmatic approach” to Brexit which would “protect the British economy”.
The summer months, he added, would be the time “we will want to work carefully with the governor of the BoE and others . . . to prepare for the autumn statement when we will signal and set out the plans for the economy in the very different circumstances that we now face”.
Mr Hammond is widely viewed as more hawkish on spending than the new prime minister, Theresa May. But he made it clear he was willing to consider all possible avenues for boosting the economy, including a possible fiscal stimulus in the autumn.
One priority area will be whether the Treasury can speed up infrastructure spending with additional government guarantees and, perhaps, greater government borrowing at historically low interest rates.
Mrs May has repeatedly called for more Treasury infrastructure project bonds to keep the economy on track in the months ahead. But she stopped short of creating a new ‘infrastructure ministry’ on Thursday, as some politicians had expected. Instead, she combined business and energy — leaving transport on its own.
“Of course we’ve got to reduce the deficit further but looking at how and when and at what pace we do that, and how we measure our progress in doing that is something that we now need to consider in the light of the new circumstances that the economy is facing,” Mr Hammond said.
The new chancellor’s concerns on the immediate health of the economy were shared by the BoE’s Monetary Policy Committee. Although it voted eight to one to keep interest rates on hold at 0.5 per cent, it signalled that it would provide monetary stimulus in early August because the economy was now on a “significantly lower path for growth”.
The BoE minutes noted “preliminary signs that the [referendum] result has affected sentiment among households and companies, with sharp falls in some measures of business and consumer confidence”.
Regional agents of the BoE, who have been in contact with companies across the UK reported that “around one-third of business contacts spoken to in the week following the referendum were expecting some detrimental impact from the result on their capital spending over the next 12 months”.
In light of the available evidence so far of a weak housing market and reduced confidence, the MPC said that “the uncertainty flowing from the referendum was likely to depress economic activity in the near term”.
“Most members of the [Monetary Policy] Committee expected monetary policy to be loosened in August,” according to the minutes, with the committee considering “a range of possible stimulus measures”.
The BoE’s inaction surprised financial markets, which expected an immediate rate cut. Sterling raced higher in reaction, gaining 2.7 per cent on the session to reach a peak of $1.3470. It later eased back, closing 1.5 per cent higher at $1.3336.
The FTSE 100 index of equity prices dropped 0.24 per cent compared with gains across European and US bourses as equity markets reacted with disappointment to the BoE’s decision not to cut rates.