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Bank of England braces for no-deal scenario to raise or cut interest rates

Devdiscourse News Desk | London | Updated: 17-05-2019 14:12 IST | Created: 17-05-2019 11:30 IST
Bank of England braces for no-deal scenario to raise or cut interest rates
BoE Chief Economist Andy Haldane said last week the central bank was monitoring data on road congestion around major ports. Image Credit: Wikimedia

The Bank of England, preparing for a possible no-deal Brexit, is trying to harness reams of real-time digital data on traffic jams, card payments and shipping in case it has to make a snap decision to raise or cut interest rates.

The BoE typically has plenty of time to think about its next steps for the world's fifth-biggest economy. It announces its rate decisions every six weeks or so after studying established economic indicators, many of which take weeks to prepare. But it might have to move much more quickly if Britain leaves the European Union without a deal to cushion the shock, a real prospect for later this year with Prime Minister Theresa May struggling to break a Brexit impasse in parliament.

BoE Chief Economist Andy Haldane said last week the central bank was monitoring data on road congestion around major ports, collected from Google Maps, as part of a push to improve its real-time understanding of the economy ahead of Brexit. As well as traffic jams at ports, officials are looking at shipping and aircraft flows and financial transactions data. They are also speeding up their scouring of Google and Twitter to try to get a more up-to-date feel for the mood of consumers.

Crucially, the BoE's number-crunchers want to know which micro-level data they can trust, and which tend to send misleading signals. Shortly after the Brexit referendum in 2016, surveys of companies flashed warning signs that the economy was nose-diving, prompting the BoE to cut interest rates to a record low and ramp up its massive bond-buying programme.

But the economy -- in particular, spending by consumers -- largely weathered the shock, raising questions about whether the BoE should have acted more cautiously. In a speech at the University of Sheffield on May 7, Haldane said monetary policymakers might be able to put more trust than in the past in so-called high-frequency data, some of which is now being published by Britain's official statistics office.

In other fields, errors in weather forecasting have been halved in a generation and digital data and new ways of modelling were helping scientists to understand how oceans, the internet and galaxies work, he said. "Until recently, fewer such high-resolution data existed when it came to tracking flows of goods and services, people and money through our economy. That is changing," Haldane said.

BREXIT PUZZLE

The BoE has said there would be no automatic reaction to cut or raise interest rates after a no-deal Brexit. On the one hand, consumers and businesses might cut back on spending, hurting growth and making the case for a rate cut. But the pound is likely to tumble, pushing up import prices and inflation, normally arguing for higher interest rates.

As part of its dig into the data, the BoE is trying to pull apart the price chain for imported goods from the moment they enter Britain to when they go onto the shelves. That could give policymakers a better sense of what kind of short-term inflationary hit they could expect from any tariffs on imports from the EU, and what the impact on supply chains could mean for inflation in the future.

The BoE usually looks at 40 components of Britain's consumer price index, but it could peer deeper into the price chain to get a more a detailed sense of potential inflation pressures. Any clues from digital readings are unlikely to lead to an overhaul of how the BoE tracks the economy. But Haldane said there was real potential from the data thrown up by payments systems and corporate and public sector information systems to track workers, goods and services. "These micro-level data could, with time, be pieced together to provide a macro -- or micro-to-macro -- a model of the economy. Or that, at least, is the promise," he said.


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