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Carney Braces for Final Year With BOE Tied to Brexit's Mast

Lucy Meakin
Carney Braces for Final Year With BOE Tied to Brexit's Mast

(Bloomberg) -- Mark Carney is headed into his last full year at the helm of the Bank of England, and it could be his most turbulent yet.

In a tenure that has seen the Scottish referendum, two general elections and the Brexit vote, the BOE governor is now in charge of keeping the ship steady as the divorce from the European Union comes to fruition. With consumer and business confidence tumbling, there’s little chance of a policy move until officials get more clarity over the U.K.’s future relationship with the bloc.

“With the domestic economy you have to wait until the big event happens and then make a judgment at that point about whether you should be hiking, reducing or sticking,” Catherine Mann, Citigroup chief economist, said in a Bloomberg Television interview. “The uncertainty is really the problem.”

On Thursday, the BOE kept its benchmark interest rate unchanged at 0.75 percent and said Brexit worries have “intensified considerably.”

Investors are no longer fully pricing in another rate increase in 2019, seeing about a 60 percent chance of a quarter-point hike by the end of next year.

While Prime Minister Theresa May hammered out a draft deal with the EU, she then saw mass resignations from her Cabinet in protest, faced down internal party factions and postponed a planned Parliament vote on the agreement.

“The broader economic outlook will continue to depend significantly on the nature of EU withdrawal,” the MPC said. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”

The BOE is also grappling with how to exit years of ultra-loose policy alongside the rest of the world’s biggest central banks. The Federal Reserve on Wednesday lifted borrowing costs while cutting the outlook for more hikes next year. The Bank of Japan kept its policy unchanged on Thursday. Sweden raised its benchmark for the first time since 2011.

If Brexit goes smoothly, policy makers have said that limited and gradual rate increases will be needed over the next few years to keep inflation in check. But turmoil puts that assessment in doubt.

A disorderly Brexit would put the BOE in crisis-fighting mode -- the pound would fall, fanning inflation, while new trade barriers would put the brakes on growth. It warned on Thursday there could be greater-than-usual short-term volatility in U.K. data.

Keep up-to-date with the latest Brexit developments

Even if a Brexit deal can be reached with the transition favored by Carney, the economic outlook is troubled. Officials lowed their growth forecast to 0.2 percent this quarter and see little improvement at the start of 2019. Further complicating matters, inflation is set to drop below the BOE’s 2 percent target in January on lower oil prices. At the same time, the bank sees domestic price pressures getting stronger.

(Updates with confidence readings in second paragraph.)

--With assistance from David Goodman.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, ;Paul Gordon at pgordon6@bloomberg.net, Brian Swint

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