Debate Magazine

Nobody Move Or Sterling and Interest Rates Get It!

Posted on the 12 May 2016 by Markwadsworth @Mark_Wadsworth

Yesterday's Project Fear output, via MBK:
From The Times:
Leaving the European Union would immediately cause the value of the pound to plummet by as much as 20 per cent, while income tax would have to rise to counter cuts in migration, a respected think tank has warned.
A vote to leave would result in a “significant shock to the UK economy”, the non-partisan National Institute for Economic and Social Research has said, as it presented prospects for the UK up to 2030 in the event of Brexit.

From The Telegraph:
The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.
Michael Saunders, who was chief economist at Citibank, and will join the rate-setting MPC in August, said the drastic rise would be needed because Brexit would cause the pound to collapse, which would send inflation sharply higher.

If we were to stupid enough to reduce 'good' immigration (younger, healthier, skilled/working, ready to integrate) then yes, income tax rates on everybody else might rise a bit, some people say that would be a price worth paying. I don't think it is, but clearly, if we reduced 'bad' immigration, tax rates would go down a bit, which looks like a win-win to me.
The rest of their logic seems to be [unspecified cause] = GBP falls = inflation rises = Bank of England has to increase interest rates.
There's no particular reason to assume that Brexit would cause GBP to fall that dramatically, but even if it did, what would be the knock-on effects? No need to ponder too hard, let's just look at the last two instances of this happening - after Black Wednesday in 1992 and between 2008 and 2012, when GBP fell by a quarter each time.
There was surprisingly little impact on consumer prices (putting land prices to one side) in either instance, and the Bank of England did not increase interest rates - during both periods it actually reduced them (leading to land price inflation).
So nothing to worry about, as per usual.
Nobody move or sterling and interest rates get it!


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