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AOFM Weekly Issuance Slate

--BOE's Vlieghe Says Hike Not Likely On No Brexit Deal
--Stresses Uncertainties But His View Will Probably Be Dominant On MPC
By David Robinson
     LONDON (MNI) - While the Bank of England's Gertjan Vlieghe broke ranks on
Thursday to become the first Monetary Policy Committee member to publicly give a
view on interest rates after a no-deal Brexit, the logic he used to predict that
policy would likely be loosened is probably shared by his colleagues.
     Vlieghe, a standard bearer for greater openness, repeated at a Resolution
Foundation event his colleagues' line that all options would be on the table but
added that it was more likely policy would be paused or eased than tightened.
That is what markets expect and the analytical framework used to arrive at this
view will be shared across the MPC, MNI understands.
     If the UK leaves the European Union at the end of March with no deal in
place the MPC will have to wrestle real time with an upward push on inflation
from a sterling fall and supply-side hit, and balance these against weaker
demand and risks to confidence. Tightening in that scenario is not the most
plausible outcome.
     The Bank has examined previous supply side shocks, such as the 1970s oil
shock and the Japanese experience after the Kobe and Fukushima earthquakes.
     "Despite the fact that supply contracted, interest rates fell. Central
banks cut rates because they said: 'Well, I want to make sure that confidence
does not go down further because of this disruption,'" Vlieghe said.
     If lorries get held up at the border following a hard Brexit the risk is
that businesses stop even trying to get vehicles through, adding to supply
disruption. Nothing monetary policymakers can do can address this, Vlieghe
noted, but they can support business and consumer confidence.
     For business to find new suppliers and restore supply chains is a lengthy
process.
     "Substitutions take time ... They don't take years but they take months and
maybe quarters," he said in a question-and-answer session.
     --INITIAL BOE REACTION MIGHT BE WRONG ONE
     Vlieghe was open about the fact that the MPC could get its reaction to a
no-deal Brexit wrong and may have to reverse policy.
     "We will have to see in real time and respond. The first direction that we
move in may not be the right one," he said.
     As BOE Deputy Governor Ben Broadbent has spelled out, and his colleagues
have repeated, the response to Brexit developments will depend on the relative
magnitudes of the supply and demand hits and the impact on sterling.
     But they have not revealed assessments of the most likely outturn in the
event of no deal. The no-deal scenario is excluded from assumptions used in the
Inflation Report's central projections, so these say nothing about the likely
policy response.
     Alone among his MPC colleagues, Vlieghe has pushed for committee members to
publish their own rate projections and to be open up about their views on the
policy path.
     This would mean, as Riksbank policymakers have done, hammering home the
message that their views could change and change rapidly as events unfold. But
Vlieghe has, so far, been an outlier.
     It is easy to imagine split votes on the MPC in the event of no deal, but
there is nothing to suggest Vlieghe is going out on a limb.
     Market pricing suggests sterling is set for another sharp fall in a no-deal
Brexit and MPC members have been clear this could damage demand.
     Broadbent set out in detail back in March 2017 how Brexit appeared to be
weighing on sterling and said "empirically the correlation between exchange
rates and demand disturbances is clear."
     "The negative effects of the depreciation on consumption (via import prices
and household income) are expected marginally to outweigh its more positive
effects on other parts of demand," Broadbent said, and Governor Mark Carney this
week highlighted how sterling weakness has hit wealth.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
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