Carney braces for final year with BOE

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 UK’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.”
The BOE has 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 minutes of the central bank’s December meeting are littered with references to the intensification of uncertainty around the UK’s impending departure. The issue will continue to tie the BOE’s hands in 1Q, but if Brexit is smooth and orderly, as we expect, the central bank is likely to waste no time lifting rates,” said Dan Hanson, Bloomberg Economics.
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 lifted borrowing costs while cutting the outlook for more hikes next year. The Bank of Japan kept its policy unchanged. 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.