By Paul Hannon 
 

The Bank of England is more likely to cut than raise its key interest rate should the U.K. leave the European Union without a period in which to adjust to new trade rules, a policy maker said Thursday.

The central bank's Monetary Policy Committee last week said it could move its key rate in either direction in the event of a "no-deal" Brexit, and officials have given few indications as to their individual preferences.

But in a speech delivered in London, Gertjan Vlieghe provided a rare insight into how he would likely respond to a Brexit in which there is no transition period, causing "severe" economic disruption.

"In the case of a no-deal scenario I judge that an easing or an extended pause in monetary policy is more likely to be the appropriate policy response than a tightening," Mr. Vlieghe, one of the four members on the nine-strong MPC who don't work for the BOE full-time, said.

The U.K. is scheduled to leave the EU on March 29, but lawmakers have rejected the departure agreement negotiated by the government. That increases the risk that the U.K. could leave without a trade agreement, and a transition period that would allow businesses time to adjust to the new rules.

The BOE has said that a no-deal Brexit would lower the economy's capacity to supply goods and services and weaken the pound, both developments that would raise prices. But such a departure from the EU would also weaken household spending and business investment, which would ease inflationary pressures. Speaking last week, BOE Governor Mark Carney said it is impossible to judge now exactly how the balance of those forces would work out in practice.

"One can imagine scenarios where households and businesses expect the negative effect on the economy to be quite persistent, so would lower their consumption and investment demand by more than the supply disruption itself," Mr. Vlieghe said.

Assuming that Brexit occurs with a transition period while a new trade deal with the EU is negotiated, the BOE has said it would likely raise its key interest rate slightly over coming years. But Mr. Vlieghe said a slowdown in the global economy, and weaker growth in the U.K. itself, means fewer rate rises will be needed to keep inflation at the central bank's 2% target.

"When I first spoke about the future path of Bank Rate a year ago, I thought one to two quarter-point hikes per year in Bank Rate was the most likely central case," he said. "But since then, the economic outlook has changed."

Instead, Mr. Vlieghe said he now considers it likely that only one move a year will be needed, but the pace of tightening would be even slower if the pound gained on the avoidance of a "no-deal" Brexit.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

February 14, 2019 04:56 ET (09:56 GMT)