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-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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