The Bank of England is finally adjusting to the fact that the Brexit economy is growing steadily

The Bank of England is finally adjusting to the fact that the Brexit economy is growing steadily

One of the ideas behind inflation targeting was creating predictability in monetary policy and enabling the ‘forward guidance’, implicit in the target and the actions promised to make it happen, more effective. It must be said that the Canadian governor, Mark Carney’s, tenure has been marked by a great downgrading of predictability. Governor Carney has been unable to resist the temptation to talk a lot about what he might do, and then promptly to change direction.

Only a few months ago the Governor was talking about prolonged monetary ease in the face of ‘Brexit uncertainty’. This looked quite strange given that the economy was growing strongly throughout 2016, even if softer consumer spending was apparently reducing 2017 growth. However, now the Monetary Policy Committee seems to have ganged up on him, and reached a more robust view of the economy, closer to ours: that it is growing steadily and that ultra-loose monetary conditions look inappropriate therefore. Effectively monetary policy has been on ‘emergency loose’ status since the financial crisis struck hard after the Lehman bankruptcy in September 2008. The MPC has finally decided enough is enough: monetary policy must return gradually to normal as befits a normal economy.

To keep the Governor onside the argument is being put about on Brexit that the Bank ‘cannot offset’ the effects of a long-term regime change such as Brexit. This is rich considering the Governor has been arguing that it must on every possible occasion. However, it seems to have done the trick and the Bank line is now seamlessly to ‘renormalise’. To which we say ‘Hallelujah!’ This process is coming online just as the Basel Committee adjusts to the Trump administration’s demands for a softening of bank regulation – at last some reversal of the draconian demands for ever-higher capital injections into banks, with their result in the near-aborting of the recovery from the crisis, itself caused mainly by central bank incompetence.

So there will be a gradual raising of interest rates and an even more gradual selling-off of the huge amounts of government bonds held by the Bank (round about a third of the national debt). This must be welcomed as a step away from a market in savings that has been hopelessly mucked around by monetary policy: returns to savers have been tiny, while the government has paid negative real interest rates for its massive borrowing and medium to largeish companies with weak prospects have been allowed to survive on essentially free money. All the while small companies, where disruptive innovation is potentially strong, have been denied credit because the rulebook says they are ‘risky’ and banks must hold a lot more capital when they lend to them. This has been a mad bad world of credit.

Meanwhile the Brexit process continues on its inexorable course. The EU negotiators are not being cooperative so it looks as if getting agreement on trade and even on a transition period may be unobtainable. But Mr Davis keeps on putting forward sweet reason, so putting the lack of progress firmly in the EU’s court. It so happens that the UK benefits most from this lack of agreement, since without it we will go to WTO rules faster and so more quickly reap the gains from free trade and UK-based regulation.

It has never been right to bet against free trade and competition in Britain’s long history. Brexit will be no exception. It remains the case that many sophisticated commentators have yet to catch up with the extent of EU protectionism and over-regulation. Getting rid of this while still selling to the EU across quite small tariff barriers, as is done by all non-EU countries of the world, will usher in a period of lower prices and more competition, the same recipe that gave us the Thatcher period of resurgent productivity.