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Free AccessPREVIEW: BOE To Stay On Hold Amid Brexit Uncertainty
By David Robinson
LONDON (MNI) - The Bank of England's Monetary Policy Committee is set to
sit tight at this week's meeting, with Brexit uncertainty acute in the days
running up to the March 29 deadline for exit from the EU.
Issues facing the committee, including what tools could be deployed in the
event of no deal and any planning for an extraordinary April meeting if
necessary, will all have been dealt with elsewhere. The minutes issued Thursday
will contain the usual run through the global and domestic economic data and
some policy debate, as Bank Rate is left at 0.75%.
A hot topic for the MPC is whether to hold to its public narrative that if
parliament approves the withdrawal agreement with the EU uncertainty will fade,
prompting a hefty pick-up in business investment. The alternative scenario is
that political turmoil and the still-to-be-defined nature of any final trade
deal with the EU would mean uncertainty persists.
In the event of hard Brexit, Governor Mark Carney has said that the Bank of
England could either raise or lower rates, depending on the differing magnitudes
of the impact on demand and supply, but MNI understands that the most likely
outcome would be an easing of monetary policy, combined with a new Term Funding
Scheme to ensure lower rates are passed on by lenders.
MPC newcomer Jonathan Haskel in his inaugural speech said Brexit "is a
process not an event," and openly questioned whether there would be a strong
rebound in business investment, which contracted in every quarter of 2018, even
if a withdrawal agreement is concluded.
As the MPC meets this week speculation has swirled over whether the March
29 deadline will be extended, for how long, and whether the price of Prime
Minister Theresa May getting her deal through would be her subsequent
resignation - allowing a successor to aim for a harder Brexit.
--PROLONGED UNCERTAINTY
As Carney has said the problem facing UK business and consumers over Brexit
is that there "are pretty fundamental things that are just not known."
The Brexit "process has the possibility of creating more cliff-edges ...
Since the very nature of investment is that it needs payback over a period of
time there is a risk that prolonged uncertainty around the Brexit process might
continue to weigh down on investment," Haskel said.
That scenario is markedly bleaker than the central projection in the Bank's
February Inflation Report.
"Business investment, precisely because it's being held back by uncertainty
now and because, conditional on a deal, that uncertainty begins to ebb away,
business investment recovers pretty strongly in this forecast. There's a lot of
stuff to catch up on. So, things will get better, conditional on a deal and a
transition," Broadbent said.
Potential prolonged uncertainty continuing to weigh on business investment
could be treated by the MPC as a downside risk which does not lower the modal
projection. The committee will be able to look at all this in full in its May
Inflation Report forecast round, assuming that the UK has not crashed out with
no deal before then.
One possibility Haskel cited was "companies might feel so uncertain that
they might just carry on as normal for reversible decisions like hiring .. since
they don't know how else to react."
At its March meeting the committee will be able to discuss the latest
labour market data, published Tuesday, which showed record employment growth
through January. This could be seen as further evidence that firms are opting to
support output growth through labour expansion rather than harder-to-reverse
capital investment.
The headlines from the MPC meeting will very likely be shrugged off by
markets: a nine-to-zero vote for unchanged policy, no explicit attempt to shift
market rate expectations and debate around the ramifications of Brexit
uncertainty.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]
To read the full story
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Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.