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EU remain vote may still lead to interest rate cuts – MPC

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Written by: Samantha Partington
20/05/2016
The UK may need to cut interest rates even if the country votes to remain in Europe if the economy fails to improve, a Bank official has warned.

Speaking to an audience at The London Business School, Gertjan Vlieghe, an external member of the Monetary Policy Committee said following a vote to remain, he wanted to see ‘convincing evidence’ of an improvement in the economic outlook, in line with previous forecasts.

“If such improvement is not apparent soon, this will reduce my confidence that inflation is likely to return to the target within an acceptable time horizon without additional monetary stimulus,” he said.

Vlieghe said the upcoming referendum made its usual tools for measuring growth ‘less informative than usual’ because households and companies tended to postpone spending until after major events such as this.

If the UK votes to remain, he expects the release of any pent-up desire to spend, which will boost economic growth.

UK Gross Domestic Product (GDP) growth has continued to slow from around 3% in 2014, to approximately 2% in 2015, to less than 2% in 2016 so far.

Persistently disappointing global growth, government plans to reduce its deficit, weaker than expected productivity growth, and uncertainty about the upcoming referendum on the UK’s membership of the EU, are all factors creating   a drag on GDP.

“The challenge for the Committee is that we do not know how much of the slowing in growth is due to the referendum, an effect which should be short-lived, and how much of it reflects a more fundamental loss of underlying momentum, which might be more persistent,” he added.

The rate of inflation, as measured by the Consumer Prices Index, fell from 0.5% in March to 0.3% in April – moving further away from the Bank of England’s target of 2%.

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