MNI POLICY: BOE Carney: Sees Scope For CPI Linker Market

-Carney Says CPIH Is Tracking Well; Favours Transition Period

By David Robinson

     LONDON (MNI) - Bank of England Governor Mark Carney gave evidence at the

House of Lords Economic Affairs committee Tuesday.

     The following are key points from his testimony:

     -Carney endorsed the idea of ditching the retail prices index (RPI) and

stopping issuing RPI linked gilts and backed creating a new inflation linked

gilt market.

     He said that moving to a single inflation measure was "highly desirable." 

     There is an open debate over which measure should be used, such as CPI, or

CPIH or another "democratic" measure.

     Carney praised the way CPIH deals with housing costs, through imputed

rents, saying it was "tracking well" and added that it was "the most promising"

according to BOE experts.

     -Debt Management Office head Robert Stheeman has warned of the risk of

fragmenting the UK inflation linked market by issuing CPI gilts but Carney was

dismissive of this argument.

     "Think about it as starting a new market not fragmenting an old market," he

said.

     He added that he believed that the demand would be there for new index

linked gilts.

     The Lords committee has advocated reforming RPI but Carney was guarded on

this, saying the Lords proposal would be treated with due seriousness. 

     -The scale of the economic hit from a disorderly Brexit is smaller now than

it was in November when the BOE published its Brexit scenario analysis, Carney

said.

     Carney cited the progress that companies and regulators had made in their

preparations. The UK and EU have, for example, agreed a year extension on

servicing cleared derivatives and both sides have taken various steps to reduce

border tensions.

     The BOE's November disorderly Brexit scenario assumed it would result in an

eight percentage point hit to GDP over three years but Carney said that this had

been reduced by 2.5 to 3 points.

     The improved preparations "reduce the level of the economic shock (but

there is) ... False precision in all these numbers," he added.

     -The BOE Govenor said that how hard Brexit hit would be partly a function

of how in control of its own destiny the UK was.

     Carney said that financial markets were ascribing only a very low

probability to a no deal/no transition Brexit. It would still be a large shock

if the UK did crash out without any deal with the EU.

     -On the current economic conditions, Carney highlighted the mix of high

employment, falling business investment and strong tax takes.

     He said this reflected, in part, the decision of companies to take on staff

rather than make capital investments in a period of heightened uncertainty.

     Firms have assumed that "for marginal expansion, it is better to hire than

to build," he said.

     The most recent data showed a marked slowing in hiring, he added.

     -Carney was asked about unwinding quantitative easing, with the Monetary

Policy Committee having agreed that unwinding will only start when Bank Rate,

currently at 0.75%, rises to 1.5%.

     That 1.5% level looks distant at present but Carney suggested it would not

be lowered.

     "If it takes longer (to reach) it would take longer to begin the unwinding

of QE," he said.

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

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