MNI POLICY: BOE'S Broadbent Says 35% Fall In Q2 GDP Realistic

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Ben Broadbent said the

Office for Budget Responsibility's scenario for a 35% quarterly fall in output

this year was realistic and he warned that demand could remain weak even after

the lockdown eases. 

     The OBR, the official forecaster, assumed a V-shaped recovery after the

coronavirus lockdown ends but in a webcast Broadbent was sceptical, saying that

business and consumers could curb spending even after the government announces

changes in lockdown rules.

     Social consumption, a category covering spending on such things as cafes

and public events "alone is worth more than 10% of GDP and much of that has been

closed pretty much entirely," Broadbent noted.

     The OBR's estimate of a 35% quarterly Q2 GDP fall was based on estimating

the likely effect on each sector of the economy and Broadbent said

"Unfortunately, I don't think that is an unrealistic number."

     The recovery after the near-term activity plunge could be fraught, because

consumers, worried about exposure to the virus and the fragility of their

finances, may continue to cut back on spending irrespective of what the

government says on the lockdown.

     "The question we will have to think about is whether behavioural responses

of people mean that even if the government-imposed lockdown was lifted demand

may remain weak in some areas because of people's natural caution," Broadbent

said.

     Near term, Broadbent predicted that inflation would head lower, with

headline CPI possibly falling below 1% in coming months as a result of the

plunge in oil prices. He took encouragement from the fact market pricing does

not show a rise in inflation expectations, based on breakeven rates, suggesting

that QE is not seen as leading to an inflation overshoot.

     The BOE will publish its updated projections in its May Monetary Policy

Report.

     Where Broadbent was more upbeat was over the impact of the Bank's fresh

GBP200 billion in fresh quantitative easing. It launched QE in part in response

to a spike in gilt yields and liquidity shortages and Broadbent said that the

measures the Bank looks at have shown liquidity returning.

     QE "certainly helped to calm markets .. Steadily, those liquidity matrix

have been improving throughout the last three or four weeks since we and other

central banks began those operations," he said.

     His colleague, BOE Chief Economist Andy Haldane, said that the cut in Bank

Rate to just 0.1% had been largely passed on to mortgagees although high

loan-to-value mortgages had been withdrawn.

     It is a moot point, however, whether lower mortgage rates are of any

practical concern for potential new homeowners as "the  housing market is

effectively closed," Haldane said.

     Broadbent stressed that the focus of monetary policy was to avoid long-term

scarring to the supply side of the economy, by seeking to avoid mass business

closures and high long-term unemployment, and that it could do nothing to

prevent a very large near-term hit.

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

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