The governor of the Bank said the UK’s greater openness as a result of EU membership “provides potential for both greater growth and shocks”.
Giving a speech in Oxford he said: “More persistent shocks require monetary accommodation.
“For example, the euro area’s difficult sequence of internal price adjustments, together with its overall fiscal restraint and tight credit conditions, imparted persistent headwinds to UK growth, and, had they not been addressed, on inflation.
“Those headwinds contributed to a persistent lowering of the ‘equilibrium’ interest rate in the UK – the rate required to maintain demand in line with potential. That called for the bank rate to be held lower for longer in order to lean against the disinflationary impulse emanating from abroad.
“These points illustrate that the UK’s openness is central to the deliberations of the BoE monetary policy committee in formulating monetary policy strategy. But neither openness nor any obligation of EU membership ultimately prevents the MPC from doing its job.”
At its meeting on Thursday 22 October, ECB president Mario Draghi committed to re-examine the ECB’s quantitative easing programme in December. Government bonds rallied on the news, with the German two-year bund hitting a low of -0.32 per cent and the euro falling a cent and half against the US dollar.
Evans Hart View
Stephen Evans, managing director for Evans Hart Ltd, said: “It still seems unlikely that the Bank of England will move before the US Federal Reserve, not least for fear of an upward spike in sterling that could dampen exports.
“There is also fear of inflation, which governor Mark Carney is seeking to stoke, given that increases in the consumer price index still stands well below the 2 per cent target.”