MNI INSIGHT: BOE Term Funding Likely Revived In No-Deal Brexit

--Policy Easing Likeliest Outcome On No Deal; TFS To Come Back

By David Robinson

     LONDON (MNI) - A no-deal Brexit would likely prompt monetary policy easing

by the Bank of England as well as the swift resurrection of the Term Funding

Scheme (TFS), its vehicle for ensuring a rate cut is passed on by lenders, MNI

understands.

     The TFS was launched after the 2016 vote to leave the European Union, and

Bank of England research indicates it was successful in ensuring that a lower

Bank Rate fed through to commercial bank lending rates to the public.

     In a speech last week, Monetary Policy Committee (MPC) member Michael

Saunders said the abnormally weak pass-through to lending rates from recent

increases in Bank Rate, from 0.25% to 0.75%, indicated diminishing returns to

monetary policy near the effective lower bound (ELB), the level at which

additional rate cuts add no extra stimulus. Deposit rates appear sticky at low

levels, and if net interest margins on commercial, mortgages and other household

loans are funded through deposits they too tend to move little.

     "Close to the ELB, a lower policy rate would be reflected mainly in wider

lending spreads ... rather than lower mortgage rates," Saunders said.

     This could be a problem if the Bank needs to ease in the event of a hard

Brexit. In August 2016, responding to the EU referendum, its solution was not

only to cut Bank Rate to 0.25% but also to deploy the TFS. This allowed lenders

to borrow for four years at Bank Rate so long as they maintained, or increased,

lending to the real economy.

     A BOE research paper by Bianca Ginelli Nardi and others published in

December concluded that, "consistent with market intelligence ... the TFS has

been effective in allowing participants to pass through the reduction in Bank

Rate into lower lending rates."

     "The TFS probably also helped lower the effective lower bound for the

policy rate," Saunders stated in a footnote to his speech.

     --TENREYRO JOINS VLIEGHE SAYING NO-DEAL EASING LIKELY

     Meanwhile, another MPC member has indicated the Bank's response to a

disorderly Brexit would be more likely to be easing. Until recently, the MPC had

insisted that, in the event of no deal, policy could be eased, left on hold or

tightened depending on the relative magnitude of any fall in the exchange rate,

and of hits to supply and demand.

     External MPC member Gertjan Vlieghe was first to publicly break ranks,

saying easing would be more probable. Last Thursday fellow external MPC Silvana

Tenreyro echoed his thoughts, stating that "a situation where the negative

demand effects outweigh those other effects is more likely."

     The analytical framework that points to easing being most likely is

orthodox modern central banking. While central banks can do nothing if supply

chains are disrupted and business investment is axed, they can help cushion the

initial demand shock, Jagjit Chadha, head of the National Institute of Economic

and Social Research, said at an event last Wednesday.

     "Even if it is a long-run (supply) problem the extent to which demand

overshoots in the short run makes a case for an easing of policy which can then

be reversed at the appropriate time," he said.

     Easing is likely to come in the form of a rate cut, with the MPC having

previously estimated the ELB is very close to zero - probably around 0.1%.

     In August 2017 the MPC voted to close the TFS to new drawings, and Bank

Rate was hiked to 0.5% in November 2017. A disorderly Brexit at end-March could

well see it, or something similar, reopened.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]