MNI POLICY: BOE Tenreyro: Rate Cut Likely In Hard Brexit

-Tenreyro: Unlikely To Back Rate Hike In Next Few Months If Brexit Deal Done

By David Robinson

     LONDON (MNI) - Bank of England Monetary Policy Committee member Silvana

Tenreyro said that in her view policy was most likely to be eased in the event

of a disruptive Brexit but that this was not certain.

     Even if there were to be a Brexit deal then the external MPC member said

she would probably not back tightening policy.

     In a speech at Birkbeck, University of London, Tenreyro said that Brexit

uncertainty had increased and that markets were now factoring in a rate cut. UK

inflation, however, is currently at its 2.0% target and may rise above, making

the policy response tricky.

     The BOE's May Inflation Report showed headline CPI inflation dipping below

the 2.0% target before moving just above it in Q1 2021 and staying above it

through to the end of the forecast in Q2 2022. The MPC faces a dilemma as its

macroeconomic forecasts are based on market rate assumptions, which factor in a

hard Brexit, while the MPC's central case assumes a smooth transition to a

Brexit deal.

     The following are key points from the speech:

     -In the event of a disorderly Brexit, that is the UK leaving the EU with no

deal at the end of October, "in my view it is more likely than not that the

appropriate response would be a loosening, but this is by no means certain,"

Tenreyro said.

     -Brexit uncertainty and stockpiling and de-stocking linked to it are

distorting UK economic activity, but core inflation is not weak, unlike in the

euro area and US.

     "Brexit uncertainty has also injected volatility into the outlook for UK

activity, with stockpiling responsible for part of the strong growth figure in

Q1, which looks likely to give way to a far weaker outturn in Q2," Tenreyro

said. 

     -She cited a number of factors pushing up on inflation and making a policy

easing more problematic.

     "The labour market remains tight: employment and hours worked growth have

been strong (although average hours seem also to have been boosted by

stockpiling in the manufacturing sector). So too has unit labour cost growth,"

she said.

     -Even in the event of a Brexit deal, Tenreyro said that it was unlikely she

would back a rate hike in coming months, as sterling would likely strengthen

against a backdrop of a global economy showing signs of weakness.

     "A stronger pound would serve to dampen import price growth, moderating

upward pressure on CPI inflation from strong labour cost growth. Coupled with

signs of a weaker global outlook, recent developments likely lengthen the period

until there is a sufficient pickup in inflationary pressures for me to vote to

raise Bank Rate," she said.

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

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