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

MNI (London)
-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
     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
     -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:
[TOPICS: M$B$$$,M$E$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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