MNI POLICY: BOE Carney: Brexit Scenario Rate Hikes Mechanical

--BOE Carney, MPC Colleagues Defend Brexit Scenario Analysis

By David Robinson

     LONDON (MNI) - An assumption that Bank Rate would rise sharply in the event

of a disruptive Brexit, one where the UK crashed out in March 2019 with no deal,

was "mechanical", Bank of England Governor Mark Carney told UK legislators

Tuesday.

     Carney, along with colleagues, Deputy Governors Ben Broadbent, Jon Cunliffe

and Sam Woods, defended the Bank's controversial Brexit scenario analysis at the

Parliamentary Treasury Select Committee .

     The following are key points from the evidence session:

     --Carney told the committee that the scenarios included assumptions for the

MPC's reaction function, but these are not the same as the MPC's own judgement

of how it is most likely to react. In the disruptive scenario, inflation spikes

to 4.25% and Bank Rate peaks at 5.5% and averages 4% over a three year period.

     --Carney noted that market rate expectations were "relatively modest" but

he warned that markets had no experience of something like hard Brexit and

seemed to be taking it for granted that the BOE would pump in stimulus. "The

market has been in a position, certainly in the course of the last decade plus,

that every time something difficult happens central banks have provided

stimulus," he said.

     Further discussing the rising path of Bank Rate in the Brexit scenarios,

Carney said "It is not an assumption of the path of Bank Rate it is a

calculation, a sum of squared deviations of inflation from target and output

from potential that is calculated," he said.

     --Broadbent defend the assumption that the harder Brexit turned out to be

the further sterling was likely to fall, with the BOE envisaging a decline of up

to 25% in the most disruptive scenario. "The larger the effect on UK trade of

the UK exit the further sterling is likely to fall," Broadbent said.

     "At the moment what is priced in to the level of the exchange rates is a

number of possible outcomes. So if the eventual exit is towards the better end

of that range you would expect sterling to rise from here. If it is towards the

worse end of that range you would it expect it to fall further," he said.

     --The Bank came under fire from pundits and politicians for its scenario

analysis but Carney made the point that it had only published them because it

was asked to do so by the Treasury Committee. He said they reflected work that

the Bank has been carrying out since the EU referendum in June 2016.

     --Carney and Cunliffe were asked about the implications of the UK taking up

"the Norway option" and joining the EEA, which is seen by some politicians as a

way out of the impasse. Both highlighted the drawbacks. "Our financial sector is

about 20 times bigger than Norway's and it is much more connected," Cunliffe

said. "From a financial stability perspective it is highly undesirable to be a

rule taker and to lose supervisory autonomy," Carney said.

     --Cunliffe also, however, stressed the undesirability of the UK ending up

with no deal with the EU. He said that the stress tests showed that banks have

sufficient capital to withstand a disorderly Brexit but he highlighted specific

challenges, including servicing uncleared derivatives and the need to secure a

temporary permission regime from the EU to deal with cleared derivatives.

     --Away from the scenarios, Carney acknowledged the exceptional weakness of

real income growth in recent years but saw signs of it recovering. Over the last

decade "real income growth hasn't been this weak since the middle of the

nineteenth century," he said.

     There are, however, green shoots of recovery, he noted. "Average hours have

started to pick up, real wages have been picking up and consumer confidence

about their personal economic situation, not about the general economic

situation ... has been picking up across the country," Carney said. 

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

[TOPICS: M$B$$$,M$E$$$,M$$BE$]