PREVIEW: 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

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