Brexit Continues To Force Radical Changes In The UK

Brexit Continues To Force Radical Changes In The UK

Johnson Ramps Up Brexit Preparations

The United Kingdom is slated to leave the European Union in 94 days, at least till now, three years after the referendum showed the British public wanted to get out the cumbersome agreement that apparently stifled the rights and growth of the nation to “take back control” in their hands. The seemingly smooth process has cost the job of two prime ministers, with the lifeline of the third expected to be on edge. But the new prime minister, Boris Johnson, has bought new vigour to the Downing Street 10 and has instilled new hope in the public, with a continued anxiousness for the future. And the new government has started to prepare for the worst scenario after Mrs Theresa May, former prime minister, failed to get her deal through the parliament thrice.

Mr Johnson has given an impression that he has a serious intention to take Britain out of the EU on 31 October, with or without a deal, and this is the principal objective of his appointment and future negotiation with the EU. He warned that unless the EU leaders renegotiate the withdrawal treaty agreed last year with Mrs May, the leaders must not expect an amicable divorce, which the bloc has resoundingly rejected and called his demands as a non-starter. The EU has been assuming that the rhetoric of the new prime minister should not be taken at face value and have stuck their ground till now. But the appointment of Mr Johnson has given credibility to the danger of a hard-Brexit, at a time when the EU’s economy looks fragile.

Mr Johnson has said that the slow efforts made by the previous administration must be turbocharged, immediately stepping-up of preparations for a no-deal exit given the impasse looming over Brexit. To ensure the flow of critical goods, like medicines, into the country in the event of no-deal Brexit, the government on 26 July 2019 issued a tender for up to £300 million of contracts for extra freight capacity to counter the disruption to imports and exports across the Channel. Also, amid warnings that his no-deal plan risks breaking up the UK, he also announced £300 million of funding for projects in a tour to boost the economy in Scotland, Wales and Northern Ireland, which is aimed at critics who suggest his tough stance on Brexit could undermine the union.

Moreover, to prepare the country for the increasingly likely prospect of a no-deal Brexit, the new administration is planning an approximately £100m public-information advertising campaign in the next three months leading up to the departure. The campaign is expected to include a no-deal preparation leaflet given to every home in the country and is also likely to use large-scale media such as billboards and TV. In one of the first acts since taking office, Mr Johnson had already started a Brexit ad campaign on Facebook, proving he is not shy in putting his message across to the public, unlike his predecessor.

Adding substantially to the £4.2 billion allocated to no-deal planning under the previous chancellor, UK chancellor of the exchequer, Sajid Javid, was reported to be preparing to announce more than £1bn in increased funding for a no-deal Brexit and ramp up the preparation for Brexit. While the exact amount is not known yet, Mr Javid said that he would overhaul the approach of British Treasury to Brexit and the fund would be used to support small businesses and new infrastructure around ports, help for Britons living abroad, and cover hiring a further 500 UK border force officers.

Preparation will include a daily operations committee which will be chaired by Michael Gove, who is tasked with the Brexit negotiations, and will meet each weekday morning. Another committee on exit, economy and trade will meet regularly and be chaired by Mr Johnson himself, while an exit strategy committee will meet twice a week and also have Mr Johnson as its chairman.

Mr Gove recently said that there was a very real prospect that a deal would not be struck with the European Union before that deadline and said that the government is working on the assumption that the country will leave the bloc without a deal on 31 October, though his aim was still to leave with a deal. He further said that presenting the current withdrawal agreement signed by Mrs May to Parliament again would not be enough and reiterated that the EU would need to change their approach and renegotiate to avoid a no-deal Brexit. He added that planning for no-deal was now a number one priority for him and the new administration, showing his commitment to not shirk from a hard-Brexit.

Political experts reckon that all the efforts and tough talk by the new government are intended to pressure the EU negotiators to buckle to demands by Mr Johnson and provide him with an upper hand to deal with EU leaders. However, his plans are facing opposition from within his party and domestic organisations. The Confederation of British Industry warned the government that neither the country nor the bloc is ready for a no-deal Brexit on 31 October, reiterating their stance that exiting the EU with a deal was imperative to protect the economy and jobs. Moreover, it was reported that said efforts were underway by a grouping of anti-no-deal figures who are opposed to the stated commitment to leave the EU by 31 October with or without a deal to ensure a protest is organised before parliament returns on 3 September and prevent the UK crashing out without an agreement. Tory MPs are also gearing up for an early election, despite public announcements by Mr Johnson that he will not go to the polls until Brexit is delivered.

Bank of England to Not Follow its Counterparts

Even as European Central Bank and the US Fed prepare fresh stimulus to prop the economy amid global political and economic worries, UK central bankers are favouring a wait-and-watch approach, making the Bank of England an outlier among big central banks. The monetary policy committee (MPC) of the UK is taking a more hawkish stance, while the European Central Bank last week hinted at the relaunch of asset purchases and interest rate cut, and US Federal Reserve is poised to cut interest rates this week, amid stubbornly below-target inflation.

The Bank of England chief economist Andy Haldane last week said that the economic path is uncertain at the time and the case for holding rates is strong until the road becomes clearer. He added that the central bank should proceed with caution on any monetary policy loosening, unless the country faces some sharp economic downturn, suggesting that the member of the monetary policy committee would not support higher interest rates soon. Amid a potentially damaging no-deal exit from the European Union and fears of a subsequent slowdown in the economy, markets are now pricing in rate cuts.

Even though the bank had been signalling that to stop inflation rising above its 2 per cent target, a gradual and limited rise in interest rates will be needed, the MPC is expected to leave the policy rate unchanged when it announces its decision on 1 August. As Mr took office pledging to take the country out of the EU by its scheduled departure date, experts are worried that a disruptive, no-deal Brexit would deliver a shock to the economy which would force the bank to cut interest rates. Mr Haldane noted that even though the labour market of the country looked as strong as that of the US, its real interest rates as low as in the eurozone, putting it in an unusual position. Experts have said that MPC has a good reason to follow its wait-and-see approach, backed by Brexit uncertainty and a likely shift in fiscal policy by a new prime minister.

Experts have repeatedly said the current forecast of the bank is not providing the full and accurate picture as the forecasts assume a smooth exit from the EU while the market has started to price in the possibility of a hard-Brexit, amplifying the existing tensions in the MPC’s communication. Since May, the implied path of interest rates has fallen sharply while the pound has weakened, which would push consumer prices upwards. This would show inflation overshooting the target by a much bigger margin unless the bank adopts a more pessimistic view of the economic outlook, in line with the markets’ expectations.

The benign outlook of the bank has led to a disparity between the forecasts and the actual policy vote, and in normal circumstances, the implied overshooting of inflation would have prompted an increase in interest rate. But these are no normal time. This conundrum is forcing the bank officials to acknowledge the difficulties inherent in its present approach, and there have been calls for the bank to publish separate projections for a no-deal scenario, preparing an appropriate response should no deal materialise.

The collective view of the MPC has been that interest rates could move in either direction in response to no-deal Brexit, a point which was supported by Mr Haldane who said that the policy response to no-deal Brexit is impossible to predict in advance. He also said that the MPC might not lower interest rates as the market expects if Brexit leads to a steep decline in the pound and a sharp increase in inflation expectations. The MPC would have to decide where the balance lay as many factors point to a rise in inflation and a sharp fall in output.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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