MNI INSIGHT: BOE Cut On Table, If Downside Risks Materialise

--MPC Not Split Into Firm Hawk/Doves Camps; Rate Cut On The Table 

--Recent Comments From Carney, Haskel Highlight How Fresh Data Could Tilt Scales

By David Robinson

     LONDON (MNI) - A Bank of England cut is on the table, with no entrenched

dove or hawk camps within the Monetary Policy Committee, and members currently

supporting no change to rates prepared to shift towards easing should data

deteriorate.

     While the December MPC meeting saw a seven-to-two vote in favour of

unchanged policy, with only Jonathan Haskel and Michael Saunders voting for a

25-basis-point cut, the signs are that MPC members would all attach some weight

to the case for a precautionary reduction in the 0.75% policy rate. A cut would

act as insurance to boost the economy, with the effective lower bound, which the

committee estimates at just above zero, close.

     Equally, members also all appear open to leaving policy steady should the

economy strengthen.

     In a speech on Thursday, Governor Mark Carney sketched out cases for both

pre-emptive easing and keeping Bank Rate unchanged while stressing the

importance of upcoming data and underscoring that the debate is finely balanced.

     --UNCERTAINTY

     Uncertainty over the economic outlook is fuelled by scant evidence on how

business and consumers will respond to the elimination of the risk of an

imminent no-deal Brexit. While manufacturing purchasing manufacturing surveys

suggest global economic activity may have troughed, the UK has been going

through a soft patch and there is still little clarity over the final shape of

the trading relationship with the EU.

     In favour of policy easing, Carney noted that "there is a modest but rising

degree of spare capacity in the UK and core inflation remains subdued. There are

downside risks from global growth and the possibility that uncertainties over

future trading relationships could remain entrenched."

     "With the relatively limited space to cut Bank Rate, if evidence builds

that the weakness in activity could persist, risk management considerations

would favour a relatively prompt response," Carney said.

     But, on the other side of the debate, he said "global growth is showing

tentative signs of stabilising .. Past global monetary policy stimulus is

gaining traction and global financial conditions are supportive. Early

indicators .. suggest that there has been some reduction in Brexit-related and

domestic policy uncertainties."

     MPC member Silvana Tenreyro, one of the seven who has so far backed

unchanged policy, said Friday she would be inclined to cut if downside risks to

the Bank's assumption of a smooth transition to a new trading relationship with

the EU and a recovery in the global economy crystallise.

     "The risks to those assumptions are largely to the downside and if

uncertainty over the future trading arrangement or subdued global growth

continue to weigh on UK demand then my inclination is towards voting for a cut

in Bank Rate," she said.

     --IMPROVING CONDITIONS

     But at the same time members are alive to the possibility that there will

be at least a temporary boost from the perception of a diminution of domestic

political risks and the possibility of improving global economic conditions.

     "In my view, the current data and weak near-term forecast is enough to

justify a cut," Haskel said in a Dec. 20 speech at the Resolution Foundation,

before spelling out a raft of factors that could persuade him to change his

mind.

     These included the conclusion of U.S.-China trade talks and more rapid than

expected progress on EU-UK negotiations, with the resulting fall in uncertainty

putting gradual hikes back into contention.

     To add to the complexity facing the MPC, members have repeatedly stressed

that the hit from Brexit-related uncertainty has to be treated as both a supply

and demand side shock, with its overall impact dependent on the relative

magnitude of the effects and its impact on sterling.

     As part of its forecast round leading up to this month's meeting, with the

policy decision to be unveiled on January 30, the MPC will carry out its annual

stocktake on the supply side.

     "This assessment is particularly relevant as evidence is increasing that

the entrenched uncertainties in recent years may have weighed more heavily on

supply growth than previously anticipated," Carney said.

     That has potentially inflationary consequences, suggesting that potential

growth may be even lower than previously thought, as MNI has previously

reported.

     The outcome of the January, and subsequent meetings, appears less certain

than the current seven to-two split suggests, with the weight of the committee

quite capable of shifting rapidly either way.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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