MNI INSIGHT: BOE Will Use New Tools To Assess Brexit Response

-BOE Has Developed Extensive In-House Surveys; Uncertainty Analysis Since

Referendum

By David Robinson

     LONDON (MNI) - The Bank of England will base its policy response in the

event of a no-deal Brexit on a different set of indicators to those it relied on

when it cut rates after the June 2016 referendum on EU membership, with more

weight placed on expanded in-house business surveys and a revamped analysis of

the likely impact of uncertainty, MNI understands.

     After the referendum the composite PMI plunged to 47.7, an 87-month low and

Bloomian uncertainty, a measure based on the frequency of media references to

uncertainty, soared. The BOE's monetary policy committee launched a stimulus

package in August based on its forecast that growth would be barely positive in

the second half of the year but as it transpired the economy slowed only

marginally as consumers, and business, carried on much as before.

     Since 2016 the Bank has boosted its regional agents network, rolled out and

extended its Decision Maker Panel survey of businesses, which gives it access to

almost-real time survey data, and Bank economists have done detailed work on the

interplay between uncertainty and the real economy.

     --UNCERTAINTY

     "One of the things we have learnt since the referendum is that not all

political uncertainty is alike," MPC member Gertjan Vlieghe said in a recent

question-and-answer session at the Resolution Foundation, at which he also

indicated that he thought the most likely policy response to a disorderly Brexit

would be loosening or a prolonged pause.

     Uncertainty at present is sky high, with business and consumers all deeply

unsure over where Brexit is heading, given doubts over whether the government

will obtain parliamentary support for its withdrawal agreement with the EU and

with the March 29 deadline for a deal looming.

     Vlieghe noted that Bank research shows that sometimes higher uncertainty

has little influence on spending unless it is accompanied by financial turmoil.

The challenge for the Bank economists, identified by MPC member Kristin Forbes

as early as November 2016, has been to isolate the negative effects of widening

spreads and rising risk premia amid market volatility from heightened business

and consumer uncertainty.

     In past episodes these have often gone hand in hand, so the current mix of

elevated uncertainty and relatively easy financial conditions is a good testing

ground for measures developed by researchers including Bank economist Chris Redl

and former Bank international research head Gregory Thwaites aimed at

calibrating the impact of political and financial market volatility.

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

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