MNI POLICY: BOE Haskel: Backs Rate Cut, Downside Risks To UK

-Sets Out Enduring Arguments For Backing Rate Cut

-Sees Further Downside Risks Linger Over UK Economy

-Case For Insuring Against Lower Rate Bound By Easing Now

By David Robinson

     LONDON (MNI) - There are still significant downside risks facing the UK

economy, Bank of England Monetary Policy Committee member Jonathan Haskel said

Friday.

     Haskel, who voted in the minority for a 25 basis point rate cut at the

December meeting, set out his views on the UK economic outlook in a speech at

the Resolution Foundation Friday.

     His arguments for easing, including taking out insurance by stimulating the

economy now to try and avoid getting stuck at the effective lower bound, and his

concerns over the lingering downside risks, Brexit uncertainty amongst them,

strongly suggest he will continue to favour easing near term.

     The following are key points from the speech:

     -Haskel made clear that he was more pessimistic about the economic outlook

than the central view of the Monetary Policy Committee, captured in its Monetary

Policy Report projections. The November MPR was conditioned on Bank Rate falling

from its current 0.75% to 0.5% and holding there from 2020 through 2022 with GDP

growth predicted to be a modest 1.6% next year and 1.8% in 2021

     "I am of the view that further downside risks are lingering over our

forecast in the latest MPR," Haskel said.

     He cited the risk that uncertainty may remain entrenched over Brexit, as

the government's determination to "get Brexit done" will only lead to further

uncertainty over the shape of future UK-EU trade relations, with the ebb and

flow of negotiations between the two parties and with the government currently

pushing a hard end 2020 deadline.

     -Aside from Brexit negotiations, Haskel cited other downside risks stating

that there were "many pieces of evidence" that suggest that "the UK economy is

weaker than a year ago." These included a significant weakening in the global

economic outlook since 2018, with falling investment, which is a forward looking

indicator.

     -On the domestic side as well as elevated uncertainty for businesses and

households, Haskel cited the widening output gap. The BOE had expected it to

close and for demand to then exceed supply, but the output gap appears to be

opening up again.

     "A year ago the November 2018 Inflation Report forecast expected a positive

output gap of about 0.25% for 2019 Q4 (but) according to the Bank's latest

forecast we actually have excess supply of around -0.25%," he said, arguing that

this gap could get wider still.

     -Haskel highlighted the oddity of UK wage growth rising while productivity

flat-lined and inflation was subdued, and said his research suggested firms'

profit margins have been falling, and one possibility was that real wages would

in future head back down and unemployment would increase

     "I would expect the pace of wage growth to slow," Haskel said.

     -Haskel made the case that the BOE could buy some insurance against hitting

the policy reversal rate, or effective lower bound (ELB), by running looser

policy which could result in higher inflation that could then be tackled by

tightening if necessary at a later stage.

     "Even if it turns out that the policy-maker has overstated the probability

of ending up at the ELB, we can undo the stimulus by raising interest rates,

given the much larger policy space we have available in terms of tighter policy.

In this sense, I believe the costs of reversing policy would be quite low as

expectations are unlikely to be de-anchored from looser monetary policy after so

many years of 'lower for longer'," he said.

     -Haskel's detailed views make clear that he is highly likely to continue to

vote for easier policy in coming months. The MPC split seven-to-two in December

in favour of unchanged policy, and the January forecast round will let the MPC

look again at the economic outlook following the decisive victory of the

pro-Brexit Conservative Party in the December general election.

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

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