We made the judgement that the risks to demand were such that, even allowing for the weaker exchange rate and any immediate effects on supply, Bank rate should be reduced. But there’s no inevitability about the balance of these effects. I’ve described how the current inflation is in part the result of a divergence between the effective expectations of consumers and those in financial markets. If those expectations were to re-converge, from either end, inflationary pressure would diminish. If they diverge further the opposite would happen. Firms’ expectations will affect their investment and purchasing decisions, and these in turn can have an impact on productivity. Some of those effects could come through faster than people often assume. If they do, then even the argument that Brexit lowers growth and therefore interest rates isn’t watertight. And, to add something else to these risks, something I haven’t dealt with in this speech, a sudden switch to WTO trading rules would involve the immediate imposition of tariffs on imports, further raising their cost. Predicting others’ predictions isn’t easy, and I don’t think the balance of risks to inflationary pressure, and therefore future interest rates, is obvious. In the meantime, the MPC has little choice, it seems to me, but to take the economic data at face value. To adapt the football manager’s cliché, we can only play the economy that’s in front of us. What’s been in front of us for several months is an economy with above-target inflation and dwindling spare capacity.
Brexit and interest rates Speech given by Ben Broadbent, Deputy Governor Monetary Policy  London School of Economics 15 November 2017  I’d like to thank Mette E. Nielsen and Konstantinos Theodoridis for their valuable research assistance. I am also grateful for helpful comments from other colleagues. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Monetary Policy Committee. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Introduction and summary Hello! It’s a real pleasure to come to the LSE to give this talk. It’s a great institution; I’m fortunate to have many friends here; last, but not least, it’s barely a hop and a skip from my office. So thank you for having me. It won’t have escaped your attention that the MPC raised interest rates earlier this month. It did so, in part, because of the referendum-related decline in sterling’s exchange rate. That has pushed up CPI inflation and will continue to do for some time yet, as the rise in import costs is passed through to retail prices. Our remit says we can accommodate such effects, and take our time in bringing inflation back to target, but only so long we also think there’s spare capacity in the economy. As unemployment has declined that position has become harder to maintain. We’ve been communicating this message for some time now.