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Bank of England says worst-case Brexit scenario now 'less severe' - business live Bank of England less gloomy about Brexit; UK 'falling into recession' - as it happened
(about 1 year later)
Time for a quick recap:
The Bank of England has dialled back its worst-case Brexit scenarios, having concluded that the UK is better prepared for No Deal.
In updated advice to MPs, the BoE says that work at the ports and the government’s new tariff plans mean there would be less economic damage. It now only expects GDP to slump by around 5.5% under an damaging No Deal, with unemployment hitting 7% and inflation racing to 5.5%.
Governor Mark Carney warned that food prices would still rise in the event of a No-Deal Brexit, though, due to a slump in the pound.
He played down the suggestion he could stay on longer, if Brexit was to be delayed again. The governor also expanded on a recent speech arguing that the dollar’s dominance was detrimental to the global economy.
The pound has jumped, on hopes that MPs will push through legislation that blocks No Deal on 31 October.
Sterling rallied over $1.22 to its highest level of the week, recovering from Tuesday’s three-year low.
Data firm Markit has warned that Britain appears to be falling into recession. Its PMI surveys show that private sector output shrank in August, led by sharp contractions in manufacturing and construction.
Markit blamed Brexit uncertainty, saying:
“While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn. Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months.
Professor Costas Milas of Liverpool University thinks the Bank of England can take some credit for the improvement in Britain’s Brexit preparation.
He points out that future interest rate expectations are rather lower than a year ago, meaning less concerns about rising credit costs.
The Bank now thinks that the impact of no-deal Brexit will be less severe than what it thought in November 2018.
Mark Carney cites ongoing preparations by the UK government to deal with a possible no-deal scenario. Although this is fair, there is another possible reason for the less severe outlook. Back in November 2018, markets expected the policy rate to rise to 1% in 2019 and even higher to 1.2% in 2021 and 1.4% in 2022. Markets now expect the policy rate to drop to 0.5% in 2020, remain at this level in 2021 and rise slightly to 0.6% in 2022.
Arguably then, expectations of a looser monetary policy might have also contributed to the less severe no-deal Brexit outlook. The Governor might not want to blow his trumpet but the expectation of monetary easing has arguably helped.
The session ends with Steve Baker appearing to suggest that Mark Carney should run the International Monetary Fund.
Baker, a leading Brexiter MP, has clashed with Carney over the years. But he seems genuinely impressed by Carney’s speech about ending the dollar’s dominance.
In a final question, directed at Andy Haldane, Baker says the world needs leadership to handle the upcoming changes in the monetary system.
Q: So, should the IMF be led by a politician, or by someone who really understands these issues in detail and can articulate what should be done to address these root causes?
It’s rhetorical question, which Haldane has no trouble evading.
But Baker’s point is that Carney had, it seems, been interested in succeeding Christine Lagarde. However European politicians have nominated Kristalina Georgieva, a former EC vice-president and current CEO of the World Bank.
Mark Carney fails to make shortlist for IMF top job
The session wraps up with interim chair John Mann thanking the BoE for their “exemplary” work helping the committee (although he also thinks its grasp of regional economics needs brushing up).
Steve Baker MP is now asking Mark Carney about his recent speech last month, warning that the dollar is too dominant and could be replaced by a digital currency.
The governor explains that the dollar has an importance in the world economy that isn’t matched by the size of the US economy.
That’s a problem when the US economy is relatively strong, meaning US monetary policy is tighter than the rest of the world.
In theory, it would make sense to shift away from relying on the dollar. But, the last time the world economy shifted (when the dollar replaced sterling as the global reserve currency) it was a “bumpy ride”. So it’s not easy to rebalance the economy.
Q: But is it possible to avoid a fundamental structural change in the monetary regime?
Carney thinks there will be a shift, but it could take ages (he cites Rudiger Dornbusch’s quote that unsustainable things last longer than you expect, then change a lot faster than you’d imagine).
Mark Carney: dollar is too dominant and could be replaced by digital currency
Chief economist Andy Haldane says he agrees with Carney that the problem of the dollar’s dominance is more acute, as more countries have issued dollar-denominated debts.
More reaction to the Bank’s new Brexit scenarios:
Yippee Ki Yay - acc to Mark Carney a no-deal exit would see the economy shrink by only 5.5% not the 8% slump previously predicted. Oh, the joys.🔥🔥
5% shrinking of the economy. That’s the same as the change between 2007 and 2009. Let that sink in. Mark Carney actually thinks this is good news 🙈
Q: Will the UK economy get a boost from Brexit supporters once Britain leave the EU? Might they raise their spending, helping growth?
BoE policymaker Gertjan Vlieghe says there is evidence that people in leave-supporting areas are more optimistic, but this doesn’t manifest itself in higher spending.
Labour MP Wes Streeting arrives late, after listening to (or possibly enduring) today’s spending review.
He asks why consumers are more confident about their personal finances than the wider economy.
Mark Carney says consumer confidence is benefitting from low unemployment and solid wage growth. Those rising incomes are driving consumption.
The bigger the firm, the more likely they are to be ready for Brexit, says governor Carney.
But then it depends how well the ports function -- a major carmaker could be totally prepared, but still reliant on factors outside their control.
On Brexit preparations, Mark Carney says that 75% of companies think they are as ready as they can be.
But many still expect their output to fall.
He also says some firms who thought they were ready are now saying they’re not prepared, partly because they’ve been given more information about what needs to be done.
Some more highlights from Mark Carney today:Some more highlights from Mark Carney today:
Favourite Carney stat this afternoon: Every 5% of normal Customs capacity that gets through Dover equates to around 0.25% of GDP @bankofenglandFavourite Carney stat this afternoon: Every 5% of normal Customs capacity that gets through Dover equates to around 0.25% of GDP @bankofengland
Mark Carney explaining the taxonomy of economic "shocks": "They call it the dismal science for a reason"Mark Carney explaining the taxonomy of economic "shocks": "They call it the dismal science for a reason"
BoE Governor Carney says UK economy is softer than i would have expected a few months ago $GBPBoE Governor Carney says UK economy is softer than i would have expected a few months ago $GBP
Q: The UK economy shrank 0.2% in the second quarter of 2019, so do you agree with the government that the economy is “fundamentally strong”?Q: The UK economy shrank 0.2% in the second quarter of 2019, so do you agree with the government that the economy is “fundamentally strong”?
Mark Carney says that Q2 was probably less weak than the headline data suggests, as Brexit stockpiling dragged some activity forwards into Q1.Mark Carney says that Q2 was probably less weak than the headline data suggests, as Brexit stockpiling dragged some activity forwards into Q1.
But he’s not jubilant, warning that “the underlying pace of growth is weak”,and just above zero.But he’s not jubilant, warning that “the underlying pace of growth is weak”,and just above zero.
More positively, the labour market is tight with record low unemployment, but real wages have only turned positive (with earnings outpacing inflation).More positively, the labour market is tight with record low unemployment, but real wages have only turned positive (with earnings outpacing inflation).
Q: What would a no-deal Brexit mean for food bills?
It is likely that food bills will rise, overwhelmingly because the pound would fall and push up import prices, Mark Carney replies.
Domestically-produced food prices would also rise, in line with pricier exports, he adds.
He repeats his earlier point that tariffs would have a limited impact on food prices, as the government’s “temporary tariff regime” doesn’t include significant increases.
Whatever form Brexit takes, it will mean a “material change” to the UK’s trading relationships, Mark Carney tells the Treasury committee.
Every major trade deal in recent decades has taken at least 18 months, some took four years, he points out. That’s why the BoE favours a transition period, to help companies adjust.
Q: Would the impact of Brexit be worse if it happened just before or after a general election?
“Pass “ smiles Mark Carney.
Q: What would happen if Britain suffered a no-deal Brexit and a trade-war induced global downturn, at the same time?
Mark Carney says the Bank believes a global trade war could knock 1% off UK GDP. But he doesn’t want to simply add that to the ~ 6% fall in a worst-case Brexit.
Asked about the global economy, Mark Carney says world growth has not reaccelerated as fast as expected.
He says this is because there is now a full-blown trade war between the US and China, which is also hurting business confidence worldwide.
Carney warns :
We are close to a manufacturing recession across the advanced economies, and important parts of the emerging world, which has had a knock-on impact on trade.
But he doesn’t think we face a global recession, as the fundamentals in the major economies are still quite strong.
Q: Would Mark Carney possibly consider staying on longer at the Bank of England?
The governor reminds the committee that he has extended his tenure twice already, to help to UK prepare for Brexit.
Q: You’re due to leave on 31st January -- that could be the same day as Brexit (if another extension is agreed).
Currently I’m leaving months after the Brexit day, points out Carney - reminding the committee that the existing deadline is 31 October.
Q: But if there was to be a cliff-edge on 31 January, could you stay on to help?....
The appointment of a new governor is a matter for the government, Carney replies.
Q: Has the Brexit crisis made the governorship less appealing?
MPC member Jonathan Haskell says not - it’s just part of the job.
Fellow MPC member Gertjan Vlieghe says Brexit makes the role “more challenging”, but any suitable candidate should relish that...
Mark Carney has also provided this chart, showing how the Bank has scaled back its forecasts for a worst-case Brexit.
Back in November, the BoE warned that a disorderly Brexit could wipe 7.5% off Britain’s economy.
It now believes GDP would only decline by around 5.5% -- still a big shock, but a less damaging one. Unemployment would double to 7%, and inflation would more than double to 5.5%.
In the letter to the committee, Carney cites several reasons for the new, less severe forecasts, including border preparations and the UK’s new tariff plans.
Q: How would the Bank of England protect the economy after a no-deal Brexit?
Carney says the Bank stands ready to intervene to provide liquidity into the financial system if needed.
It could cut the requirements on banks to hold capital, potentially releasing up to £300bn of balance sheet firepower.
And on monetary policy, the Bank would have to decide whether to cut interest rates to stimulate growth, or raise them to tackle inflation.
Q: Do you still think food prices would jump by 10% after a no-deal Brexit?
Mark Carney says the tariff schedule laid out by the government earlier this year show that tariffs on food from Europe would be lower than the Bank thought last November.
Previously, the Bank thought tariffs would add 5% to food prices, while a weaker pound would add another 5%, adding up to 10%.
It now thinks almost all the impact will come from exchange rate moves -- so food prices would be 5% to 6% higher.
Q: How would your forecasts change if there was a no-deal Brexit, not a smooth transition?
Mark Carney says the economy would slow, the exchange rate would fall further, and inflation would rise in a no-deal scenario.