REPEAT: Analysis: BOE To Face Trade-Off In Case Of Hard Brexit

-Carney, Colleagues Grilled Over No Deal Brexit By Treasury Select Committee

By David Robinson

     LONDON (MNI) - A scenario in which the UK leaves the EU without a trade or

transition deal next March, undermining sterling and potentially prompting Bank

of England stimulus, dominated proceedings as Governor Mark Carney and other top

officials were grilled by parliament's Treasury Select Committee Tuesday.

     The BOE's central forecasts place no weight on the possibility of a

so-called "hard Brexit". But market calculations of the odds of this outcome

have risen to one in four from one to five just three or four months ago, BOE

Chief Economist Andy Haldane told lawmakers on the committee.

     Such a scenario would leave the monetary policy committee facing the same

trade-off it faced after the referendum in favour of leaving the EU in June

2016, of having to weigh higher anticipated inflation against the likely hit to

economic activity.

     "Ex-ante the direction of policy is not clear. It is a balance between the

upward pressure on prices and the effect on employment and activity," MPC member

Silvana Tenreyro told the TSC.

     The Bank officials identified three potential sources of upward inflation

pressure from no deal, assuming there would no transition period after Brexit

occurs in March 2019, let alone any subsequent favourable trade relationship

with the EU.

     --SUBSTANTIAL FALL IN STERLING

     The first upward price effect would come from a likely substantial fall in

sterling, the second from higher tariffs and the third from the hit to supply

capacity.

     "I don't think you take it as automatic that the shock to price level would

be one-off. Much will depend on what happens to the supply side," Haldane said.

     Carney pointed out that some of the hit to the supply side could be

instantaneous if in March 2019, when the Brexit process is scheduled to end,

current supply chains were rendered obsolete.

     The experience of the Brexit vote, and previous shocks to sterling, suggest

that the pass through from the currency's fall to domestic prices can endure for

up to three years. That could leave the MPC with a lengthy period of above

target inflation to deal with.

     The Bank's August Inflation Report, conditioned on a smooth transition to

an average of the various plausible Brexit deals, had headline inflation holding

a little above the 2% target for the next three years.

     --BREXIT COULD PROMPT BOE TO SUPPORT ACTIVITY

     Nevertheless, Carney still believed the likelihood was that the MPC would

come down on the side of stimulating the economy rather than adding a monetary

tightening shock to the country's woes.

     "I would expect the MPC would want to use the flexibility it has to support

real activity despite upward pressure on inflation but only within the limits of

its tolerance," he said.

     Away from the doom and gloom of the no deal scenario, however, Carney

stressed that there were upside risks from Brexit if a deal was struck and

investment was boosted and sterling appreciated.

     Away from Brexit, the MPC members faced only light questioning on the

policy outlook, although Carney, asked about press speculation that he could

extend his time as governor, confirmed that he would be prepared to stay on

beyond June 2019 to help manage the Brexit process, should the government want

him to.

     Carney and his colleagues stuck to the line that future hikes, should

Brexit go smoothly, would be limited and gradual and there was no discussion

over when the next hike would come.

     Having hiked in August, the chances of another move this year look

vanishingly slim.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com