Brexit: What is Next for Great Britain’s Economy?
The Bank of England is the central bank of the United Kingdom and is the basic model on which most of the banking systems in the world are based. Just like any other central bank, the Bank of England is purposed to maintain monetary and financial stability of the United Kingdom. In relation to its role as the economic watch dog, the central bank is expected to cut interest rates as the Brexit vote that is to determine the membership of the United Kingdom within the European Union closes in.
Most economists forecast a recession in the wake of the vote and for this reason the bank’s expectations are high on the slashing of the rates in order to evade the recession. The Monetary Policy Committee is a section of the central bank that is tasked with deciding the appropriate level of the main interest rate also known as the bank rate or base rate in the UK.
Since March 2009, the interest rate has been maintained at a rate of 0.5%. Things seem to change now that the United Kingdom plans to withdraw from the EU. Earlier the bank had speculated a rise in the rate which most economist argue would probably be possible by 2017. Recently, the referendum results plunged the British economy into uncertainty which is mainly centered on its trading relationships that may be at stake.
The uncertainty has put off investment in the region as household are unsure of how the economy may be affected eventually. According to the policy makers from the central bank, a cut in the interest rate would mean more investment and increased money supply. It would also make exports more competitive in the global market though imports would be costly.
On the other hand, from another point of view the cut in interest would weaken the pound further and even raise the inflation rate higher than the 2% target set by the bank. However, the bank’s governor Mark Carney only promised some monetary stimulus in the summer which is viewed by many investors as a sign of slashing the interest rates. With the central bank stuck between either increasing or decreasing the bank rates in this tricky financial situation, only time will tell what the final decision will be.