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Market Sentiment Provides Key Driver


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Kiwi Kept In Check Despite Risk-On Impulse

--Carney Says Policy May Tighten Post-Hard Brexit
By David Robinson
     LONDON (MNI) - The global recovery is most likely to be ended by trade
conflicts that result in increased protectionism and hit business investment,
Bank of England Governor Mark Carney said on Tuesday.
     In a question-and-answer session at a Financial Times event the BOE
Governor also said that there was a risk Brexit could end badly, and warned that
monetary policy could be tightened in response.
     The following are key points from Carney's Q and A:
     --Asked it global growth would end in trade conflict Carney said: "This is
the dynamic that has the potential to end the global expansion."
     Imbalances in the global growth cycle "are not extreme" and the pockets of
financial risk should not tip the global economy into contraction but "questions
about the openness of markets, market access, the consequences of that for
business investment ... that has the potential, and we are seeing some signs of
this, to move us out of this relatively delicate equilibrium," Carney said.
     --The BOE Governor rejected the view that further currency depreciation,
likely in the case of a hard Brexit, would benefit the UK simply because it
would enhance competitiveness.
     "Having the currency adjust because the fundamental income prospects of the
country have been marked down, that is part of the natural adjustment mechanism.
But that is not a step towards prosperity. It is a hit to income," Carney said.
     Sterling has fallen 15% on a trade-weighted basis since the June 2016
referendum and reflects "the view of the market that UK relative incomes are
going to be lower for some time," Carney said.
     He added that market pricing pointed to further currency devaluation in the
event of a no-deal Brexit.
     --The manner in which the Monetary Policy Committee reacts to a hard Brexit
is yet to be determined, Carney said. The UK risks coming out with no deal at
the end of March.
     "It is not clear what the direction of monetary policy (will be) ... In the
end we will have some conflicting forces," he said.
     "We will have for a period of time a reduction in the supply capacity of
the economy. We would expect lower demand, not least because it (the EU) still
is our largest trading partner ... and the exchange rate would adjust and the
net of that might well be inflationary and inflationary for a period of time,"
Carney added.
     "We are not saying that definitely implies a tightening of policy but we do
want to put people on notice that this is a different situation than what had
happened ... through all of our professional lifetimes, which is that hits to
the economy had been largely hits to demand. This is actually, for a period of
time, a hit to supply," he said.
--MNI London Bureau; tel: +44 203-586-2223; email:
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