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Free AccessAnalysis: BOE MPC To Face Trade-Off In No Brexit Deal Scenario
-Carney, Colleagues Grilled Over No Deal Brexit By Treasury Select Committee
By David Robinson
LONDON (MNI) - The Bank of England's central forecasts place no weight on
the possibility of a so-called "hard Brexit", but a scenario in which the UK
leaves the EU without a trade or transition deal next March, undermining
sterling and boosting inflation, dominated proceedings as Governor Mark Carney
and other top officials were grilled by parliament's Treasury Select Committee
Tuesday.
Market calculations of the odds of a hard Brexit have risen to one in four
from one to five just three or four months ago, BOE Chief Economist Andy Haldane
told lawmakers on the committee.
Such a scenario would leave the monetary policy committee facing the same
trade-off it faced after the referendum in favour of leaving the EU in June
2016, of having to weigh higher anticipated inflation against the likely hit to
economic activity.
"Ex-ante the direction of policy is not clear. It is a balance between the
upward pressure on prices and the effect on employment and activity," MPC member
Silvana Tenreyro told the TSC.
The Bank officials identified three potential sources of upward inflation
pressure from no deal, assuming there would no transition period after Brexit
occurs in March 2019, let alone any subsequent favourable trade relationship
with the EU.
--SUBSTANTIAL FALL IN STERLING
The first upward price effect would come from a likely substantial fall in
sterling, the second from higher tariffs and the third from the hit to supply
capacity.
"I don't think you take it as automatic that the shock to price level would
be one-off. Much will depend on what happens to the supply side," Haldane said.
Carney pointed out that some of the hit to the supply side could be
instantaneous if in March 2019, when the Brexit process is scheduled to end,
current supply chains were rendered obsolete.
The experience of the Brexit vote, and previous shocks to sterling, suggest
that the pass through from the currency's fall to domestic prices can endure for
up to three years. That could leave the MPC with a lengthy period of above
target inflation to deal with.
The Bank's August Inflation Report, conditioned on a smooth transition to
an average of the various plausible Brexit deals, had headline inflation holding
a little above the 2% target for the next three years.
--BREXIT COULD PROMPT BOE TO SUPPORT ACTIVITY
Nevertheless, Carney still believed the likelihood was that the MPC would
come down on the side of stimulating the economy rather than adding a monetary
tightening shock to the country's woes.
"I would expect the MPC would want to use the flexibility it has to support
real activity despite upward pressure on inflation but only within the limits of
its tolerance," he said.
Away from the doom and gloom of the no deal scenario, however, Carney
stressed that there were upside risks from Brexit if a deal was struck and
investment was boosted and sterling appreciated.
Away from Brexit, the MPC members faced only light questioning on the
policy outlook, although Carney, asked about press speculation that he could
extend his time as governor, confirmed that he would be prepared to stay on
beyond June 2019 to help manage the Brexit process, should the government want
him to.
Carney and his colleagues stuck to the line that future hikes, should
Brexit go smoothly, would be limited and gradual and there was no discussion
over when the next hike would come.
Having hiked in August, the chances of another move this year look
vanishingly slim.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.