MNI POLICY: BOE Wary On No-Deal Stimulus

-BOE Carney Stresses Bank Has Stimulus Firepower

By David Robinson

     LONDON (MNI) - The UK's economy could shrink by as much as 5.5% and

inflation peak at 5.25% if the country leaves the European Union without a deal,

according to a worst-case scenario, assuming no fiscal stimulus, published by

the Bank of England on Wednesday.

     Unemployment would rise to 7%, according to the scenario, which Governor

Mark Carney stressed was only the worst imaginable case and not a forecast.

     In evidence to the Treasury Select Committee, Carney said the Bank would do

what it could do support the economy, although his Chief Economist Andy Haldane

expressed caution about adding stimulus in the event of no deal. Their Monetary

Policy Committee colleague Jonathan Haskel was neutral on policy direction.

     Here are other key points from the evidence session:

     --Carney said that the BOE would not intervene in the foreign exchange

market in the event of a no-deal Brexit except "in the most extreme

circumstances," where the market was malfunctioning.

     Instead it would let sterling adjust and use monetary policy to support the

economy as far as possible.

     -While MPC members Gertjan Vlieghe and Silvana Tenreyro have previously

said policy is more likely to be eased than tightened in the event of a no deal

Brexit, Haldane and Haskel declined to endorse this view.

     "I would be cautious about loosening monetary policy, barring a sharp

downturn in demand in the economy. Despite slowing, underlying UK growth remains

only a little below potential and the labour market remains tight," Haldane said

in his written evidence.

     He told the TSC that it was worth reflecting on how much stimulus had

already been injected through lower yield curves with lower rate expectations

around the world.

     Haskel said that given uncertainty regarding the magnitude of the effect of

a no-deal Brexit on demand, supply and the exchange rate, he was "even less

certain of that we can be confident in the direction of monetary policy."

     --Carney painted a sombre picture of the economic outlook.

     He said that trade tensions between U.S. and China had mutated into "an

actual trade war" and that, looking through the volatile data, the UK economy

was growing very weakly.

     "The fundamentals of the major economies are still quite strong," he said,

buy he added: "there is a risk we move to much slower growth and that there is

limited ability to offset that."

     --Carney stressed that a no-deal Brexit would be a supply side shock, that

the economy would take time to adjust, and that monetary policy could do nothing

to offset that.

     It could only try to support demand, but its powers would be limited.

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

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