MNI POLICY: BOE Carney: Rate Hike Possible If No Brexit Deal

By David Robinson

     LONDON (MNI) - The Bank of England would be likely to raise its key policy

rate if consumer demand held up in the event of a no-deal Brexit, Governor Mark

Carney said.

     Carney, Deputy Governor Jon Cunliffe, Chief Economist Andy Haldane and

Monetary Policy Committee member Michael Saunders did not unveil the Monetary

Policy Committee's detailed Brexit scenario analysis when they gave evidence to

the Treasury Committee on Tuesday, but did comment on the issue of the UK's

withdrawal from the EU.

     Following are key points from the evidence session:

     --Asked what would happen if consumers were upbeat in the event on news of

a no deal Brexit but financial markets took a negative view, Carney said that

mix would point to policy tightening.

     "If the economy moved further into excess demand because the rate of

spending was maintained or accelerated" and sterling depreciated on a no deal

scenario and the supply side was hit "I would expect that monetary policy would

be tightened," Carney said.

     --Carney highlighted how hard it is for the Bank to get a fix on the

potential impact of a no-deal Brexit.

     Large supply shocks are rare and "you have to stretch back into the 1970s"

to see anything comparable, he said. But the expectation is that investment, and

particularly inward investment, would be hit hard.

     "You would see some immediate supply-side shock," Haldane said.

     --Cunliffe and Saunders both said that there were signs of a slowdown in

economic activity in the fourth quarter, extending into early 2019.

     "Surveys of output and investment are pointing to subdued growth in coming

months," Cunliffe said in his written testimony, adding that business investment

has been falling.

     "It seems likely that economic growth in Q4 2018 and perhaps Q1 2019 will

slow from the strong gain (0.6% on the quarter) recorded in Q3. That is partly

because Q3 growth itself benefited from erratic gains in some areas, for example

construction, after earlier weakness," Saunders said.

     --MPC members are divided as to how likely pay growth is to accelerate

further.

     Saunders highlighted upward pay pressure. He noted that surveys showed

firms' recruitment difficulties were "at or around the highest levels recorded

in recent decades" and that underlying pay growth had picked up to around 3%

from 2% to 2.5% a year ago.

     Cunliffe noted that pay growth has previously undershot the MPC's forecasts

and that it was unclear to what extent changes in the labour market had affected

the relationship between unemployment and pay.

     Cunliffee argued for a cautious approach to tightening, while backing the

MPC's view that gradual rate increases were likely.

     "In a period where there remained significant structural uncertainties

about the post-crisis economy and the relationship between the balance of supply

and demand on the one hand and inflation on the other ... there needed to be a

higher evidential threshold for policy changes," he said.

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

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