MNI INTERVIEW: Brexit Delay Makes BOE Hike Even Less Likely

--NIESR Director, Ex-BOE Young: Scales Tipped Against Hike

By David Robinson

     LONDON (MNI) - The seven-month extension of the deadline for the UK's

withdrawal from the EU to the end of October makes a near-term UK rate hike even

less likely, Garry Young, Director of Macroeconomic Modelling and Forecasting at

the National Institute of Economic and Social Research said.

     Bank of England veteran Young, in comments to MNI, rebutted the view,

expressed by some analysts, that the Brexit extension could provide a window of

opportunity for the BOE's Monetary Policy Committee to tighten.

     In its quarterly forecast round, the NIESR also factored in slower global

growth and lower import price inflation, further tipping the scales against

monetary tightening.

     Even absent the forecast change, Young said: "the Brexit extension would

have made a Bank Rate rise marginally less likely than it would have been had

Brexit taken place in March."

     This was because "the risk of no-deal and a possible reversal in interest

rates would still be ahead," Young added.

     In its previously quarterly forecast the NIESR had predicted a

25-basis-point hike this August but it has pushed back the likely date for the

next hike to August 2020.

     "We have revised down the world outlook, including import price inflation,

and interest rates globally. Continuing high uncertainty at home is also

impacting somewhat on demand," Young said.

     The BOE will publish updated quarterly forecasts on May 2, although its

outlook is unlikely to be much changed from February, with Brexit uncertainty

continuing to weigh on business investment and encouraging firms to favour

labour, which can be easily disposed of, over capital.

     Young said the NIESR was "expecting more of the same for the rest of this

year in terms of investment, employment and productivity."

     The NIESR forecast that business investment would decline by around 1% in

2019 and that employment would rise by 0.6%, resulting in further weak

productivity-per-hour growth, of around 0.5%.

     In its February forecast round the BOE also foresaw weak cumulative

productivity growth, of 0.25% to 0.5% through Q3 this year.

     --DELAY TO DE-STOCKING

     The NIESR based its central projection on a soft Brexit assumption, with

the UK ending up in close alignment with the EU's single market. In contrast,

the BOE projections are based on an unweighted average of a smooth transition to

three possible Brexit outcomes: an aligned Norway type deal; a free trade

arrangement with the EU like Canada's, and a shift to World Trade Organisation

rules.

     "The Brexit extension does not make much difference to our main-case

forecasts beyond the short-term and I would not expect it to have affected the

Bank's forecasts much either," Young said.

     One thing the extension does do to the real economy is deter de-stocking.

     Had the EU Withdrawal Agreement got through parliament before end-March,

firms would now be running down precautionary stocks built up as the original

Brexit deadline loomed.

     "As it is they will have to manage them out to end-October," Young said.

     While this may have an impact on the quarterly growth profile, it is a

one-off effect that will fade away in the bigger picture.

     There has been some speculation that the MPC will deliver a more hawkish

message through its May Inflation Report, May policy meeting and the associated

press conference.

     But, with the Brexit deadline still ahead, sterling holding up and

inflation pressures arguably not intensifying it is not clear why the majority

on the MPC would see the need to sound more hawkish about near-term tightening.

     "Given that circumstances don't appear to warrant it and with a possible

October cliff edge ahead, I can't see a rate rise in August," Young, who spent

17 years working on monetary policy and financial stability at the BOE, said.

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

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