MNI: BOE Members Cautious On Brexit, More Upbeat Than Treasury

--Carney, New MPC Members Highlight Uncertainty On Final Brexit Deal

By Kieran Williams

     LONDON (MNI) - Bank of England Governor Mark Carney has defended the

decision of the Monetary Policy Committee to cut rates to 0.25% in response to

the June 2016 vote to leave the European Union. 

     Appearing before the Treasury Select Committee, Carney said that the MPC

viewed this move as a trade-off between having weak sterling drive inflation

above target and supporting the UK economy, deeming Brexit uncertainty as an

"exceptional circumstance" that warranted the looser monetary policy.

     "The pound has largely been determined by the prospect for that trade and

investment deal with the European Union, and has fluctuated largely around both

the expectations of the scale of the deal and the timing of that deal," Carney

said.

     Carney acknowledged to legislators that it was "more likely than not" that

he would be writing to the Chancellor to explain inflation breaching the 1

percentage point threshold over the 2% target. However, the Governor expects

inflation to peak in October or November, adding that in the wake of the Brexit

vote it was projected that sterling would fall sharply and that this has been

the primary driver of inflation.

     Earlier Tuesday, official data from the Office for National Statistics

showed that the headline inflation gauge, CPI, rose to 3% in September, marking

a 5 year high.

     Although not going overboard with Brexit doom and gloom, Carney again used

the TSC arena to spell out some of the Bank's concerns.

     Carney argued the benefits of implementation of a Brexit transition deal

from the perspective of financial institutions, adding that a Brexit 'no deal'

scenario posed a threat to Europe's financial stability. 

     Carney said that the broader economic impact from Brexit is greater for the

UK, but the financial stability impact is greater for the EU.

     The Bank of England has looked at worst case scenarios according to Carney,

focussing on measures that can be taken to mitigate those risks, including

ensuring banks have sufficient capital to handle a negative outcome. 

     The Governor seemed to take a less pessimistic view than that outlined to

the TSC recently by UK Chancellor Philip Hammond, with Carney saying the Bank

was also looking at positive Brexit outcomes which could result in an upward

revision to growth forecasts if a "full, comprehensive, ambitious arrangement"

was reached with the EU.

     Carney adduced other potential benefits of Brexit as being the chance to

focus trade deals on UK interests, more tailored regulations for the UK economy

and the chance to address specific wider policy such as the labour market and

fiscal policy.

     UK businesses are becoming "less confident about a smooth transition"

according to Carney, but the impact on households so far is less pronounced. The

Governor said that a transition deal would need to in place soon, especially for

banks, in order to protect their interests in the UK before contingency plans

were triggered.

     On this front, he echoed sentiments of the Chancellor last week that a

transition deal was a "wasting asset."

     Though many of the questions centred around Brexit, this is a subject on

which Carney is limited in terms of the answers he can give. The Governor again

navigated the questions fairly well and avoided any polarising opinions,

focussing mainly on potential scenarios for financial services and preparations

that could be undertaken in various circumstances. 

     Carney did warn against taking clearing out of London, saying that at its

most severe a fragmentation of the system would create significant costs for the

European economy.

     David Ramsden, the new Bank of England Deputy Governor for Markets and

Banking, told the TSC that Brexit was the driving factor of what he saw as the

"most significant risks to the outlook for the UK economy."

     Ramsden defended his work on a report that projected the impact of Brexit

on the UK economy during his time at the Treasury. Since the vote many of the

Treasury projections have been dubbed too pessimistic, but Ramsden highlighted

that while "some things didn't play out" other forecasts such as risks to the

exchange rate and inflation were more accurate.

     "Leaving the EU is a multi-dimensional process rather than a single event,

and the coming months are going to be crucial ones for the Brexit negotiations,"

said Ramsden.

     Silvana Tenreyro, appointed as an MPC external member in the Summer, told

the TSC "the final shape that Brexit will take will affect many aspects of the

UK economy." 

     Talking about monetary policy, Tenreyro highlighted that while it cannot

influence the output potential it can stimulate demand around output potential,

but that any policy will be dependent on what final trade deal is reached.

--MNI London Bureau; +44 203 865 3809; email: kieran.williams@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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