MNI POLICY: UK Hammond Sees Fiscal Stimulus If No Deal Brexit

--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

Wednesday.

     Hammond was giving evidence on the government economic service's Brexit

scenarios, which were released Wednesday, along with the Bank of England's work

on Brexit.

     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

said.

     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: david.robinson@marketnews.com

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