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--Hard For BOE To Provide Monetary Stimulus On No Deal Scenario: Hammond
By David Robinson
LONDON (MNI) - In the event of a 'no deal' Brexit for the UK, fiscal, not
monetary, policy would be the primary vehicle to try and offset the economic
hit, Chancellor of the Exchequer Philip Hammond told the Treasury Committee
Hammond was giving evidence on the government economic service's Brexit
scenarios, which were released Wednesday, along with the Bank of England's work
The following are key points from Hammond's evidence:
--All the Treasury Brexit scenarios showed a higher debt-to-GDP compared to
remaining in the EU. Hammond was asked if it was, therefore, misleading to talk
about a "Brexit dividend" for the public finances. He said that the boost to the
public finances would come from the removal of uncertainty once any Brexit deal
was completed. He would be able to release stg15.4 billion from the fiscal
buffers, the extra borrowing capacity available before the fiscal rules are
breached. These buffer funds would "not be needed if we had certainty about the
future of our economy" and this certainty "would in itself be an economic
stimulus, boosting investment and demand, Hammond said.
--Hammond argued that fiscal policy would take the strain if Brexit turned
sour. In a no deal Brexit scenario "of course we would do something" and the
negative shock "would elicit a fiscal policy response," he said, but added that
this would only be a short-term fix.
"What we are talking about is carrying out additional borrowing in order to
support the economy in the short-term. What our analysis shows us ... is that we
would have to unwind that borrowing and pay it back, and reduce the deficit in
the medium-term, against the backdrop of an economy that was smaller," he said.
--Hammond did not envisage monetary and fiscal policy working together to
offset an adverse Brexit shock. The BOE has warned that Bank Rate may have to
rise substantially following a no deal Brexit and Hammond did not dispute this.
"The Bank of England has been very clear that (due to) the nature of the shock
that we are now talking about in the case of a no deal exit it would be very
difficult for the Bank to provide monetary policy support for the economy," he
The exchange rate would be hit by a negative Brexit shock and with
inflation rising "the Bank's normal policy response to that would have to be to
tighten monetary policy not loosen it," Hammond said. "I suspect that in that
scenario the Bank of England would be looking at the Treasury to respond, with a
fiscal policy response," he added.
--Hammond gave his backing to the politically controversial withdrawal
agreement with the EU, which parliament will vote on next Wednesday. He said
that while he had supported remain in the referendum it was now time for unity
as "divided countries are not successful countries."
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com