Bank of England admits to being too pessimistic on Brexit

Bank of England deputy governor Ben Broadbent has admitted that the central bank was overly pessimistic about the impact of the Brexit vote.

The deputy governor said there is little doubt that the UK economy has performed "somewhat more strongly" than was expected in August.

In his opinion, recent economic data has been more positive than expected because of the resilience of the housing market, momentum in domestic demand and sterling weakness, which has helped exporters and companies with international earnings.

Nevertheless, he stands by the Bank's decision to cut interest rates to 0.25% and launch a new programme to buy corporate and government bonds in August. He believes that commentators must be careful not to read too much into what he described as "noisy" economic data.

Don't let your guard down

He told The Times that the Bank is likely to take a less "data-dependent" approach when setting interest rates in the future. Instead, judgement will play more of a role than hard data.

"We have to balance the short-term data against the medium-term outlook," he told the newspaper.

"When we say data, it's a broad term. We know there is an effect coming, we know the world looks potentially very different. We're pretty confident that the effect of that uncertainty will weigh on investment. It's difficult, therefore, to weigh those two things."

The deputy governor also warned that Brexit could have an "insidious" impact on business investment, as a result of capital expenditure decisions being delayed and uncertainty regarding long-term trading arrangements.

The risk of recession in the next 18 months has declined but the growth slowdown is still in placeBroadbent's caution has been echoed by Russell Investments' senior investment strategist Wouter Sturkenboom.

In his opinion, it is too early for investors to let their guard down when it comes to the potential fallout from Brexit, despite the sense of relief from markets in relation to its impact so far.

"As shocking as the Brexit vote was, its impact so far has been less bad than feared. Survey data on consumer and producer confidence as well as the housing sector have partly rebounded after steep initial drops. Financial markets too have recovered quickly.

"We believe, however, that it is too early for investors to let their guard down. Our growth expectation of 1% for 2016 remains unchanged. The risk of a recession in the next 18 months has declined but the growth slowdown is still very much in place," he explains.

As a result, the group is 'underweight' UK equities, particularly companies that are exposed to the domestic economy.

This article was originally published by our sister magazine Money Observer here

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