The Economist - UK - 09.14.2019

The EconomistSeptember 14th 2019 Britain 31

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Source: House of Commons

Britain, selected cabinet ministers

2010 11 12 13 14 15 16 17 18 19

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Defence

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communities

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pensions

May Rudd Javid Pa t e l

Hague Hammond Johnson Hunt Raab

Fox Hammond Fallon Williamson

Mordaunt

Wallace

Pickles Clark Javid

Brokenshire

Jenrick

Hunt Miller Javid

Whittingdale

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Wright Morgan

Duncan Smith

Crabb

Green

Gauke

McVey

Rudd

Appointed by: David Cameron Theresa May

Boris

Johnson

Coffey

Education Gove Morgan Greening Hinds Williamson

After Amber Rudd quit the government on September 7th, Thérèse Coffey became the

seventh work and pensions secretary in little more than three years. Since the 2016

referendum the cabinet has been churning, making it harder still to fix problems like

Universal Credit (Ms Coffey’s task), scarce housing and rising knife crime.

Out with the new

supporters back the right horse, just as Mr

Farage is attempting to corral Leave voters

into one camp.

Not all in the Conservative Party are re-

sistant to Mr Farage’s charms. The Brexit

Party leader has already promised not to

field candidates against the self-styled

“Spartans”, Conservative mps who opposed

the Brexit deal all three times it was put be-

fore the Commons. The concern of those

hardline Tory mps is leaving the eu, rather

than the electoral health of the Conserva-

tive Party—better a Brexit Party mpwith

their heart set on a “no-deal” Brexit than a

Tory candidate who might compromise. An

unofficial pact, with Conservative candi-

dates playing dead in certain no-hope con-

stituencies, is possible, suggest Tory aides.

This would help the party to limit its loss of

support among liberal Conservatives, who

would blanch at a formal deal with the likes

of Mr Farage.

But parties that want a second referen-

dum on Brexit, such as Labour and the

Greens, or to cancel it altogether, like the

Lib Dems, can do the same. This has hap-

pened before. In 2017, Labour and Lib Dem

activists did not tread on each other’s toes

in three marginal seats on the Sussex coast.

The unofficial tactics worked: the Conser-

vatives lost all of them. Britain is roughly

equally split into two tribes, one which

supported Brexit and one which opposed

it. The outcome of the next election will be

decided by which tribe can marshal its

members in the most efficient way. 7

I

magine thatyou are driving a car during

a torrential downpour. You hit a puddle

and start to aquaplane. Some drivers would

instinctively slam on the brakes. But some

petrolheads claim that the best course of

action is to accelerate out of trouble. Make

the wrong decision and your car could end

up skidding off the road.

The Bank of England may soon face a

similar dilemma. In the event that Britain

leaves the European Union with nothing

agreed, should it raise or lower interest

rates? Shortly after the referendum in 2016

the bank cut the base rate of interest and

launched a round of quantitative easing

(printing money to buy bonds). But now it

argues that “[t]he monetary-policy re-

sponse to Brexit, whatever form it takes

...could be in either direction.” On Septem-

ber 19th the bank is expected to keep rates

at 0.75% for the 14th month running. It may

also offer some clues about what it would

do if the storm of a no-deal Brexit swept

over Britain.

One impact of no-deal would be to dam-

age the demand side of the economy (ie,

how much stuff people want to buy). Wor-

ries about the future would prompt house-

holds to trim their spending. Unemploy-

ment might start to rise. Companies would

postpone or cancel their investment plans.

By cutting interest rates, the bank would

lower the cost of borrowing and make sav-

ing less rewarding, thereby helping to

stimulate demand.

However, rate-setters have less room for

manoeuvre than they did after the referen-

dum. Back in mid-2016, consumer prices

were growing at 0.5% a year. Now the infla-

tion rate is slightly above the bank’s 2% tar-

get. Following a no-deal Brexit, sterling

would almost certainly fall, further push-

ing up prices as imports became more ex-

pensive. A depreciation of 10% or more in

the value of the pound is likely—which, ac-

cording to a rule of thumb, would increase

prices by 2-3%. All else equal, that calls for

tighter monetary policy.

There is another reason why bringing

out the playbook from 2016 would be tricky.

The referendum did not change anything

fundamental about the British economy.

All laws and regulations in place on June

24th 2016, the day after the vote, were the

same as they had been on June 23rd. A no-

deal Brexit would be different. Britain’s

trading relationship with its biggest mar-

ket would change overnight. The imposi-

tion of non-tariff barriers would make it

more difficult to do business with the eu

market. Ports would gum up.

The shock to the supply side of the

economy (ie, what it can produce) could be

inflationary. In a speech in 2017 Ben Broad-

bent, a member of the bank’s monetary-

policy committee (mpc), suggested that

with the European market less accessible,

British households and firms might try to

source products closer to home. They

might buy British cheese, say, instead of

the foreign stuff. But domestic producers

would not be able to satisfy all that extra

demand right away. Faced with more cus-

tomers for their wares, they might simply

raise their prices.

The bank must balance these compet-

ing pressures. In the past it has tolerated

above-target inflation for a short while, the

better to support economic growth and

jobs. Mark Carney, the bank’s governor and

chairman of the mpc, told a committee of

mps on September 4th that “it is more likely

that I would vote to ease policy in the event

of a no-deal Brexit than not.” But, he added,

“It is not assured.” Other members of the

mpc sound even more cautious. Most prob-

ably the bank would treat the British econ-

omy the way that you should treat an aqua-

planing car—neither stepping too hard on

the gas nor slamming on the brakes. Any-

one looking for radical measures to save

the British economy from the conse-

quences of a no-deal Brexit is likely to be

disappointed. 7

What would happen to interest rates

following a chaotic Brexit?

Monetary policy

The no-deal

dilemma