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Under Pressure


Trend Condition Remains Bearish

     By David Robinson and Jai Lakhani 
     LONDON (MNI) - The Bank of England published the results of its 
bank Stress Tests and its Brexit scenario analysis. It highlighted how 
hard the economy would be hit by a disorderly Brexit but judged that 
banks were well placed to withstand even this worst case Brexit 
     The following are the key points from the BOE analysis: 
     -The BOE Financial Policy Committee concluded that the major UK 
banks "have levels of capital and liquidity to withstand even a severe 
economic shock that could be associated with a disorderly Brexit." 
     A disorderly Brexit is defined as one with no deal and no 
transition period, where UK/EU trade stalls with disruption at the 
     -Crucially for monetary policy, the BOE assumes that Brexit in any 
form is primarily a supply shock, which brings in its wake a hit to 
demand. In all scenarios Bank Rate is assumed to rise from its current 
0.75% level, only gently in a relatively benign Brexit while peaking at 
5.5% in the disorderly scenario. 
     -In the worst case, disorderly, Brexit scenario, UK GDP was assumed 
to fall 8% from peak-to-trough and the unemployment rate to rise to 
7.5%. The impact on the currency is eye watering, with the exchange rate 
falling 25% and ending up below parity against the US Dollar. 
     -The stress tests were based on a synchronised global recession, a 
scenario that would be markedly tougher for UK banks than a disorderly 
     Even though UK GDP falls slightly less rapidly than in the most 
disorderly Brexit scenario the hit to UK banks is much larger, primarily 
because around half of their business comes for overseas. The impact 
from Brexit, a local supply shock, poses less of a risk to the UK banks 
and under all scenarios the BOE assessment was they remained resilient.  
     -Away from the worst case, tail-risk, scenarios for Brexit used to 
assess financial stability, the BOE also published its analysis of a 
"Close Economic Partnership" with the EU. 
     This approximates to the type of deal the government is angling for 
if it gets parliamentary approval for the withdrawal agreement. Under 
this scenario there is free trade in goods and some free trade in 
business and financial services. GDP after five years could, at the top 
of the range, be 1.75% higher relative to the estimate in the November 
2018 Inflation Report - which was conditioned on an average of Brexit 
     -In a "Less Close Economic Partnership", under which customs checks 
and greater regulatory barriers to trade exist, GDP would be -0.75% 
below the November 2018 inflation report forecast for 2023.  
     -In recent days other economic bodies have published detailed 
projections of the likely impact of various Brexit scenarios.
     The National Institute of Economic and Social Research said that 
its central scenario was that "if the government's proposed Brexit deal 
is implemented, then GDP in the longer term will be around 4 per cent 
lower than it would have been had the UK stayed in the EU." 
     The Government Economic Service modelled various assumptions, and 
concluded that over 15 years a no deal scenario could see GDP 7.7% lower 
while something close to the deal could result in a 3.9% hit to GDP. 
-London newsroom: e-mail: