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Ending QE Early Would Be Hawkish... Right?


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MNI (London)
--Ups, Downs Of Brexit Transition Negotiations Sideshow To MPC Debate 
By David Robinson 
     LONDON (MNI) - Bank of England policymakers will view the continuing ups
and downs of Brexit negotiations as a sideshow, with Monetary Policy Committee
members encouraging financial market participants to focus on the economic data
flow instead.
     Absent a spectacular and seemingly insurmountable breakdown in Brexit
talks, the MPC's decision whether to hike in May will be determined by the
likelihood of excess demand over its three year forecast period and inflation
staying stuck above target.
     Markets are anticipating a Brexit transition deal will be struck between
the UK and the European Union next month, when the European Council meets on Mar
22 and 23, allowing the UK at least until end 2020 before it moves to new
trading arrangements with the EU.
     "That is the central expectation of markets and we have that through market
intelligence, we can see it in options prices," Carney told lawmakers on the
Treasury Select Committee Wednesday.
     Asked what would happen if a deal did not materialize next month, Carney
pointed out that this question covered multiple scenarios. A deal could simply
be delayed to thrash out technical details and markets and business would adjust
     The chances of the UK and EU accepting no transition deal can be done
appear to be vanishingly small as, at worst, if talks do breakdown they would
just start again at a later date.
     The Bank's quarterly growth and inflation projections are insulated to a
degree from the ebb and flow of the Brexit process. 
     The May Inflation Report round will once again use the forecasting
convention that Brexit will be a smooth, prolonged process resulting in an end
state which is the average of plausible outcomes. These range from UK/EU trade
becoming reliant on World Trade Organisation rules to the UK gaining
comprehensive goods and services access.
     The agreement, or postponement, of a transition deal will not alter these
assumptions. What would matter for the Bank forecasts is if there is a material
change in asset prices, or business or consumer behaviour shows signs of
changing substantially in response to the Brexit news. 
     While Brexit uncertainty has, so far, dampened business investment Carney
noted that it has not had a material effect on consumers, who continue to
consume out of current income.
     A transition deal may go someway to reducing Brexit uncertainty for
business, but with the end state still unknown uncertainty would likely remain
elevated and the experience to date suggests transition talks will largely pass
consumers by. 
     That leaves forward looking financial markets as the main responders to
Brexit news, and they are already factoring-in a deal.
     BOE Deputy Governor Ben Broadbent has been driving home the message that,
in any event, there is no simple read across from Brexit developments to
monetary policy. If sterling were to fall and investment to decline on the back
of perceptions that a hard Bexit was more likely, that could strengthen the case
for a  hike if consumption held up, while increased chances of a soft Brexit
could conversely boost sterling and the supply side and ease inflation pressure.
     Policymakers want market participants to respond to data flow, rather than
assuming the MPC will delay tightening due to Brexit concerns, and they are
encouraged that while it was a struggle for much of last year to get markets to
take the prospect of a hike seriously, markets now seem to accept that further
tightening will happen if the data support it.
     "Something else that has changed in the last few months is that there has
been more sensitivity to economic news and a rise in volatility ...which is
welcome," Broadbent told the TSC.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |
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