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--BOE Wouldn't Set Negative Bank Rate In Cliff-Edge Brexit
LONDON (MNI) - While recent comments by European officials have raised
hopes of an agreement on the UK's withdrawal from the EU, the Bank of England is
not about to incorporate a firm view of the consequences of Brexit into its
economic forecasts until a deal is in the bag or discarded.
Even if the EU and UK were to reach a pact, including a transition period
up until December 2020, and a non-binding political declaration outlining future
trading arrangements, the Bank would be loath to narrow down its estimates of
Brexit's economic fallout until the UK parliament had granted its approval -
something which could take weeks or months.
Instead, in its Inflation Report Nov. 1, which comes ahead of a special
European Council Nov. 17-18 that could potentially sanction a withdrawal
agreement, it will continue to use an average of Brexit outcomes as the basis
for its forecasts. This is an outcome guaranteed not to occur.
Only if a scenario were to become overwhelmingly likely would the Bank feel
compelled to alter its stance, or else risk a loss of credibility for its
forecasts, and with them for its monetary policy outlook. "Right now we are not
at the point," monetary policy committee member Gertjan Vlieghe said Sept. 25.
European Commission President Jean-Claude Juncker and Council President
Donald Tusk have sounded a more optimistic note over negotiations in recent
days, predicting an exit deal and a declaration about future relations this
Should they prove wrong, and talks fail, the effect on forecasts, which
currently predict GDP growth of 1.77% in Q4 2019 and inflation of 2.17%, would
be far more dramatic than in the case of a successful agreement, which would
allow business to carry on in a way closer to current arrangements.
When UK voters narrowly backed Brexit in a June 2016 referendum, the MPC
cut its benchmark interest rate by 25 basis points and began GBP70 in
quantitative easing. But things were different then. The economy had spare
capacity and the MPC predicted a sharp slowdown -- something which never
This time round, MPC members caution market participants should not assume
a cliff-edge Brexit, in which the UK leaves the EU in March 2019 with no deal,
will prompt fresh stimulus.
The MPC assumes there is next to zero spare capacity at present and that
the economy is moving into excess demand.
--DON'T BET ON BREXIT RATE CUT
"It is genuinely two-sided which way we are going to act. And how we will
react will depend on that balance of demand, supply and the exchange rate just
as it did pre-referendum," Bank Chief Economist Andrew Haldane said Sept. 27.
Also, in 2016, businesses were only responding to an indeterminate Brexit
at an indeterminate date in the future.
"Unlike the referendum, if this is Brexit for real rather than just the
possibility of Brexit, it would have real effects on ... our supply side
capacity if it was disorderly," Haldane said.
A substantial supply side hit would not be readily compatible with fresh
If the MPC did act, it could cut Bank Rate from its current 0.75% to near
zero but not lower, as UK lenders, unable to cut deposit rates as far as lending
rates, could see their balance sheets hit hard.
"As long as institutions have those kinds of balance sheets our judgement
is we don't want to take the policy rate below zero," Vlieghe said. "Balance
sheets tend to change very slowly so I don't imagine we'll change our minds
about that over a matter of quarters."
If the going did get really rough the MPC would, albeit reluctantly, be
able to re-launch QE, having just finessed its plans for unwinding it - a
process which was meant to start when Bank Rate rose to 1.5%.
--MNI London Bureau; tel: +44 203-586-2223; email: firstname.lastname@example.org