Brexit Will Likely Split BOE Policy Makers on How to Respond

(Bloomberg) -- Don’t be fooled by the Bank of England’s recent unanimity -- the debate will become more heated.

While Brexit has split Britain down the middle, policy makers have voted 9-0 on interest rates for the past four meetings and generally stayed quiet on the outlook as the U.K.’s impeding divorce from the European Union becomes more fraught. Governor Mark Carney and his colleagues have stuck rigorously to script, saying that interest rates could move in either direction, depending on what form Brexit takes.

Yet that ambiguity could be masking a deeper debate among officials, potentially setting the stage for the first three-way split in policy votes since the financial crisis. If the U.K. leaves the EU with no deal in place, the most difficult task would be to disentangle the myriad effects on the economy, from fresh barriers to trade to further hits to productivity and investment. Carney has even said a no-deal outcome, the most disastrous economically, could actually force the bank to raise rates.

“There will be a robust debate about what the right policy response is,” said Victoria Clarke, an economist at Investec. “It’s very difficult to see them sitting back” when the economy is suffering and saying “‘I need to raise interest rates.’ I imagine there would be a range of opinions.”

Hawkish members of the Monetary Policy Committee such as Michael Saunders and Andy Haldane are getting increasingly agitated about wage growth -- at the strongest level since the financial crisis -- meaning they could be push for hikes quickly.

Tight Deadline

Time for a Brexit deal is running out. After a series of votes in Parliament Tuesday, Prime Minister Theresa May has promised to renegotiate the most contentious part of her Brexit deal and will now head to Brussels to face a European Union that’s already warned it won’t even consider her demands. A delay to the entire process remains possible, though there is also still chance of a no-deal scenario or last-minute rally behind an alternative deal.

Carney has been keen to stress that a no-deal exit could lead to rate hikes -- given that the pound would tank, and the best the central bank could do is keep inflation under control. But markets aren’t convinced it will follow through.

Investors have moved to price-out any rate increases this year, while many commentators say it’s more likely a no-deal outcome would see the BOE return to its post-referendum playbook and ease policy to prop up demand.

Even if a deal is secured, or if Brexit is postponed indefinitely, there could still be conflicting ideas on the right policy action. While all officials agree that a smooth Brexit would mean the U.K. will need limited and gradual rate increases, some members may be more cautious than others.

Against that backdrop, HSBC predicts there could be a split as soon as next week’s decision, scheduled for Feb. 7, with Saunders voting for a hike.

“Some MPC members may be getting increasingly uncomfortable with the market ignoring warnings about the need for slightly higher rates,” Elizabeth Martins, senior economist at HSBC, wrote in a note. “Although a majority is unlikely to be on board, they might welcome the signaling value of a split decision.”

Policy makers have also been unusually quiet. Since the BOE’s last forecasts in November, there’s been only one substantial speech on policy, a marked reduction from the same period a year earlier.

When pressed on the outlook, officials have responded almost purely in hypothetical terms, while the bank’s government-mandated publication of economic scenarios for various outcomes sparked controversy when they were released last year.

“It’s in the Bank of England’s interest to stay in the background amid the political chaos,” Clarke said. “It’s probably a tactical decision.”

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Lucy Meakin

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