UK workers' scant savings make them vulnerable to possible sharp fall in jobs, says BoE policymaker

British workers are not saving enough and are ill-equipped to deal with a sudden slump in a labour market that may have already reached the limits of growth, according to the Bank of England’s Gertjan Vlieghe. 

As BoE governor Mark Carney pointed out on Thursday, businesses expect they will have to cut jobs if Britain leaves the EU without an agreement. 

On Friday, Mr Vlieghe also hinted at a likely hit to firms in a no-deal scenario from “significant near-term supply-side disruption, as well as a further fall in the exchange rate”. Supply-side shocks include events such as a sudden rise in the cost of imported raw materials or components, or disruption to the supply chain, which raise companies’ costs.

“I remain concerned about the vulnerability of households to a downside surprise in income or employment, given the very low savings rate,” said Mr Vlieghe, who sits on the BoE’s interest rate-setting committee. 

“Vacancies, while high, are no longer rising. In fact, over the past months, vacancies have experienced a rate of decline that is modest but has nevertheless not been experienced since 2012. So it is not clear that the labour market is tightening further.”

Official data, which measures vacancies in rolling three-month periods, shows consecutive declines since December.

An abrupt departure from the EU may dent businesses’ confidence and therefore their willingness to hire, Mr Vlieghe said. Companies’ response to a no-deal Brexit also depends on how prepared they are for such an outcome, he added, noting: “It is difficult if not impossible to expect businesses to incur the substantial costs to be fully prepared for a scenario that the government says it does not want.”

Both contenders to become Britain’s next prime minister have said they hope to negotiate a new agreement with the EU but that they would be prepared to leave without a deal if that was necessary to meet the 31 October deadline.

Businesses’ actions will be one of many things the BoE will look at before deciding what to do about interest rates if Britain crashes out of the EU, Mr Vlieghe said. 

But he concluded that the central bank is more likely to keep rates on hold or to reduce them than to raise them in response to “temporarily higher inflation that would result from the weaker exchange rate and possibly tariffs”, and that a cut to close to zero would be his own preference. 

This puts him in the same camp as his fellow Monetary Policy Committee member Silvana Tenreyro, who said earlier this week that a cut in interest rates following a no-deal Brexit would be “more likely than not”. 

Apart from a smooth Brexit and a no-deal one, there is a third possibility, where a new deal is not agreed later this year but a no-deal departure is also avoided temporarily, Mr Vlieghe said. The economic damage from this outcome would fall somewhere between the first two scenarios.

“That would likely involve ongoing headwinds to the economy from uncertainty, while avoiding the disruptive supply-side impact of no deal,” he said. 

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