MNI POLICY: BOE Carney: Fiscal Policy Key If New Shock Hits

-Carney Says Monetary Policy Response To No Deal Brexit, Global Trade Shock

Limited

By David Robinson

     LONDON (MNI) - Bank of England Governor Mark Carney said today that there

are limits to how extensive the monetary policy response to further trade shocks

and a no deal Brexit could be, and that fiscal policy would have to play a key

role.

     Carney, in a speech at a Local Government Association event, painted a

picture of mounting global trade tensions and stalling growth but the Monetary

Policy Committee's response to another shock would be restricted, as it cannot

keep stretching the time period over which it would tolerate an inflation

overshoot.

     The following are key points from Carney's speech: 

     -Carney noted that in the May Inflation Report forecast round the MPC was

factoring in an easing in global trade tensions, but that things had

deteriorated since then, most notably with a resurgence of friction between the

US and China.

     "The latest actions raise the possibility that trade tensions could be far

more pervasive, persistent and damaging than previously expected. The rationales

for action are broadening," he said.

     -Carney said there was a risk of trade tensions creating negative effects

that go far beyond the measured effects of increased tariffs, as they could hit

supply chains and business confidence.

     "The early indications are not promising. The more hostile and uncertain

trading environment is coinciding with sharp slowdowns in global trade,

manufacturing, industrial production and capital goods orders," he said.

     -The heightened risk of no deal Brexit comes against the backdrop of a

worsening global picture, with Carney saying that financial markets are now

putting around a one-in-three chance on no deal.

     The latest surveys suggest that UK economic growth has stalled.

     With the equilibrium interest rate low and inflation at target the monetary

policy response will be restricted.

     "If there is a material trade shock, other policies, including fiscal

policies, would likely need to play important roles in supporting the economy,"

Carney said.

     -He highlighted the fact the MPC's forecasts, based on a smooth Brexit, and

asset prices factoring in a one-in-three chance of no deal were out of synch and

said that the Bank would look at how best to illustrate these discrepancies in

its August report.

     MNI has previously highlighted how the Bank will have to think afresh about

the disconnect between its Brexit assumptions and the markets' ones.

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

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