'Better Together' supporters celebrate the result of the Scottish referendum on independence at the campaign Headquarters at the Marriott Hotel in Glasgow, Scotland, on Sept. 19, 2014.
Bank of England officials can get back on track.
With the U.K. surviving yesterday’s Scottish independence referendum, policy makers can set aside the prospect of volatility and focus on fundamentals. The decision removes a potential source of instability that would have scuppered Governor Mark Carney’s drive to safeguard the recovery and return emergency policy levels to normal settings.
Officials, who kept the benchmark interest rate at a record low on Sept. 4, no longer have to consider the possible consequences of a split, such as a run on British banks or a slide in the pound. After counting through the night, 55 percent of voters supported the “no” campaign with 45 percent backing independence.
“The result leaves the BOE on course, a lot of political uncertainty has been removed and the bank can focus on the strength of the recovery,” said Azad Zangana, an economist at Schroder Investment Management Ltd. in London. “The MPC can be confident that raising interest ratesearly next year will not hurt the recovery.”
Backup Plan
It’s a sigh of relief for the guardians of U.K. stability.
As polls two weeks ago showed the separatist “yes” camp edging ahead, officials at the BOE and Treasury gamed out their strategy to shore up the financial system by anticipating the direst of consequences. Carney told lawmakers his back-up preparations involved “considerable resources.”
There won’t be a statement from the BOE after the result, a spokesman for the central bank said today.
Uncertainty about the currency risked creating a liquidity squeeze and deposit flight, and respondents to a Bloomberg News survey saw the prospect of sterling declining 10 percent within a month. Officials would have had to act quickly to stem a panic that could have tipped the economy into another recession.
The pound strengthened as the referendum results rolled in. It rose 0.3 percent to $1.6444 as of 8:04 a.m. London time after jumping 0.7 percent yesterday.
With the passing of the vote, the nine-member Monetary Policy Committee can turn their attention to the matters they’d been looking at before polls started to show a change of heart: risks fromEurope, anemic pay growth, below-target inflation and the fastest growth in Group of Seven nations. Carney had said Sept. 9 that investor expectations for a rate increase by the spring next year were reasonable.
U.K. Expansion
Also on the agenda: changes to the national accounts that could revise past estimates of growth and affect the current assessments of productivity. These will come in at the end of the month and could impact officials’ thinking on the correct timing for increasing the key rate from 0.5 percent.
“It’s back to business as usual, markets should settle and things will continue as they were when polls were showing a wider margin in favor of the ‘no’ vote,” said Victoria Clarke, an economist at Investec Securities in London. “The accounts changes could change recent history quite significantly.”
The U.K. has expanded for six straight quarters, employment is at a record and business surveys show the recovery continued into the third quarter. Data so far hasn’t shown that the uncertainty around the referendum has affected growth, according to Stuart Green, an economist at Banco Santander SA in London.
That could lend strength to a two-member minority on the MPC who pushed for rate increases this month and last. Martin Weale and Ian McCafferty argue that the risk of wage pressures picking up rapidly means a quarter-point rise in borrowing costs is required for officials to achieve their goal of “limited and gradual” increases.
European Drag
However, the recovery still has its headwinds, and Carney is leading the majority of officials who say emergency settings are still needed. The rate of pay growth is below inflation, and consumer price gains have held below the bank’s 2 percent target for eight months. Growth in the euro area, the U.K.’s biggest trading partner, is fragile.
The prospect of a lingering demand for Scottish secession could also stoke political instability, undermine business confidence and delay the first interest-rate increase. Prime Minister David Cameron said today the vote has settled the matter for a generation.
General Election
Accepting his defeat, Scottish First Minister Alex Salmond said today there would be no “going back to business” as usual again. With 1.6 million votes for independence, he said he’ll be looking for leaders in London to make good on promises to devolve more powers to Edinburgh.
However, Cameron and the other main party leaders in Westminster will return to battle for a general election to be held in less than eight months. The U.K.’s membership in the European Union will feature heavily in that debate, with Conservatives promising a referendum in 2017.
Those votes mean that political discord and voter anger may yet weigh on the economic outlook. A departure from the EU could be a “much bigger deal” for the U.K. than Scottish vote, said Simon Wells, an economist at HSBC Bank Plc in London and a former BOE official.
“Uncertainty is the enemy of investment,” said Wells, who’s maintaining his projection for the first rate increase to come in February. “The BOE is looking for a strong recovery in investment, so anything that destabilizes that potentially means that their growth projections are too optimistic.”
To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net
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