MNI INSIGHT: BOE Tilts To Easier Policy In No-Deal Brexit

--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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