Opinion: Will policy-makers come to the rescue post-Brexit?

So long as they deliver, this should help to ensure that the economy holds up relatively well over the next few years.

It is still early days, but the incoming evidence suggests that the economic recovery went into reverse gear at the start of Q3. Meanwhile, consumer confidence tanked in July, and timely indicators of retail spending have softened too.

“Lower interest rates will incentivise spending over saving, reduce the cost of borrowing, and could help to shore up confidence as well”

Paul Hollingsworth

This will probably be enough to persuade the Bank of England to loosen monetary policy at its next meeting on August 4. While an interest rate cut from 0.5% to 0.25% seems to be all but certain, it is possible that the Monetary Policy Committee goes further than this. After all, there isn’t much scope for rates to fall further, and it has a number of other tools at its disposal, such as the quantitative easing programme as well as measures designed to boost bank lending to the real economy.

Better for retail

What would this mean for retailers? Lower interest rates will incentivise spending over saving, reduce the cost of borrowing, and could help to shore up confidence as well, both in the economic outlook and also the housing market. In short – it will provide a much-needed boost to offset post-referendum weakness.

“The new Chancellor Philip Hammond has indicated that the pace of belt-tightening should be rethought in this year’s Autumn Statement”

Paul Hollingsworth

What’s more, fiscal policy could end up playing its part too later this year. Note even before the referendum, one of the big drags on the economy over the next few years was set to be another bout of austerity. But the new Chancellor Philip Hammond has indicated that the pace of belt-tightening should be rethought in this year’s Autumn Statement. The Chancellor could even provide some giveaways to consumers, such as a cut to VAT, or another near-term rise in the personal allowance.

Let’s make one thing clear – austerity is far from over, but the fact that it now seems likely to be less severe over the coming years is another reason to think that the ultimate impact of the vote on consumer spending won’t be as hard as some have warned.

Policy-makers to the rescue, then? So far we have had suggestions and loose promises – now they must deliver.

• Paul Hollingsworth is UK economist at Capital Economics