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--BOE Set To Revisit Effect Of Uncertainty On Brexit Investment  
--Brexit Outlook Stays Cloudy Despite Transition Period Talks 
By David Robinson
     LONDON (MNI) - As part of its supply side "stock take" for the February
Inflation Report forecast round, the Bank of England will revisit the likely
impact of uncertainty on business investment and activity, MNI understands.
     For businesses, uncertainty looks set to remain elevated as the Brexit
process drags on. The assumption that uncertainty chills investment is
uncontroversial, but estimating the magnitude of the effect is exceptionally
     There is little prospect of a quick fix to alleviate Brexit uncertainty.
The UK's drive to negotiate a transition deal to kick-in after it leaves the
European Union in March 2019 leaves the debate raging over what the likely end
state will be.
     The BOE monitors how Brexit is effecting business through its network of
agents and its Decision Maker Panel survey.
     "There are many issues that still need to be negotiated during that
transitional phase...So I think it will continue to feed the uncertainty. Until
everything is done firms will not know where they stand," Paul Mizen, the BOE
consultant who co-heads the DMP, told Market News.
     The BOE MPC over-estimated the likely near-term effect of uncertainty on
business and consumer activity in the wake of the June 2016 vote to leave the
EU, with growth holding up in the next two quarters before fading in 2017.
     Work by Bank economists Marko Melolinna and Srdan Tatomir, revealed in a
blog this month, moved away from looking at how uncertainty impacts swings in
output and instead looked at how it effects firms' investment.
     Their data suggested that "uncertainty is a crucial factor in firms'
investment decisions," the authors stated.
     "An increase in uncertainty produces a relatively persistent effect on
investment ... This effect peaks after one year and then gradually dies out over
the next two years," they said.
     Even if uncertainty is an unreliable guide for forecasting near-term GDP
the MPC, which produces three year ahead forecasts, could well place weight on
it in making its business investment projections.
     A problem the firms face now is that while uncertainty generated by, say, a
financial shock can fade relatively quickly the uncertainty generated by the
Brexit debate just rolls on. 
     The spread of employers' views on where Brexit will end up, from the
process fizzling out into de facto remain through to hard Brexit, reflects the
spread of views among political insiders.
     A new survey of the views of politicians, however, pointed to political
infighting ahead over the terms of a transition deal, let alone the desired
shape of the final outcome.
     The Ipsos MORI survey covering 105 members of parliament, who gave their
views anonymously, found that while 85% supported the idea of a transition
period 74% of Conservative MPs believed it was unacceptable for freedom of
movement to continue during it.
     Replicating existing EU arrangements in the transition period should be
relatively straightforward but any attempts to start negotiating rule changes,
including by restricting freedom of movement, would complicate negotiations and
further fuel business uncertainty.
     In its February Inflation Report, the Bank will publish its latest
assessment of how the UK's supply side is faring.
     Labour supply has weakened, with net migration declining as the country's
pulling power has diminished due to a softer currency and doubts for immigrants
over future arrangements.
     MPC member Michael Saunders noted in his January 17 speech in London that
the overall UK workforce growth fell from 1.0% year-on-year growth in 2016 to
just 0.4% in late 2017, with employers facing widespread recruitment
     The work by Bank economists on uncertainty will help inform the Bank's
thinking on the investment outlook on the supply-side to accompany its work on
the labour supply side, with Brexit clouding the entire outlook.
--MNI London Bureau; tel: +44 203-586-2223; email:
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MNI London Bureau | +44 203-865-3812 |