Matthew Lynn Matthew Lynn

The Bank of England can’t remain in its ‘Brexit’ parallel universe forever

House prices are in freefall. Unemployment is rising relentlessly. The pound is plunging on the markets, and companies are re-locating to Paris and Frankfurt in droves. In the parallel universe Mark Carney increasingly seems to live in, that is a pretty accurate description of the British economy. In this universe, however, the picture is very different. The economy is doing just fine – and that is making it increasingly hard to understand why interest rates are being held at ‘emergency’ levels to cope with the ‘catastrophe’ of leaving the European Union.

At a meeting of the Monetary Policy Committee yesterday, the Bank left rates on hold at 0.25 percent, while hinting that might finally go up next month. In the aftermath of the referendum, it cut rates down to that level, to cope with the shock of leaving. It was a perfectly reasonable decision to make. No major economy had ever left the EU before, and no one had any real idea what kind of impact it might have. Certainly plenty of businesses were very anxious, and collapsing confidence can very quickly hit output. It would have been reckless for the Bank not to respond.

But more than a year has now passed. And what impact has Brexit made? Remarkably little. The country has carried on being what is has been for a long-time – a largely debt-fuelled, consumer-led economy, dominated by retailing and property speculation, with mediocre productivity and poor wage growth, but with lots of bright entrepreneurs, and with employment rates and pockets of wealth that are as good as any in the world. In other words, a mixed bag – but neither much better or worse for leaving the EU.

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