BoE warns on ‘cliff-edge uncertainties’ – European equities wobble before Brexit summit

LONDON: The Bank of England yesterday expressed concerns that further “uncertainties” over a “cliff-edge” no-deal Brexit “could have a significant effect on spending” by businesses. The BoE decided to keep its main interest rate at 0.75 percent following a meeting at which policymakers discussed “the possibility of further cliff-edge uncertainties that could have a significant effect on spending as any new deadline approached” for Brexit.

The central bank said that doubts over Britain’s exact departure date from the European Union were already weighing on “short-term economic activity, notably business investment”.

Minutes of its latest meeting this week added: “Shifting expectations about the potential nature and timing of the United Kingdom’s withdrawal from the European Union have continued to generate volatility in UK asset prices, particularly the sterling exchange rate.”

Prime Minister Theresa May headed back to Brussels yesterday to beg for more time to deliver her Brexit plan, but EU leaders are likely to refuse her request for a three-month postponement.
The BoE yesterday added that according to its own findings, “around 80 percent of (UK-based) companies judged themselves ready for a no-deal, no-transition Brexit scenario”. This compared with about 50 percent in January of its regular survey of about 300 businesses.

Despite the increase, many of the companies surveyed “also reported that there were limits to the degree of readiness that was feasible in the face of the range of possible outcomes in that scenario.
“These included issues relating to tariffs, border frictions, exchange rate movements and recognition of certifications, which many companies had noted were outside their control,” the BoE minutes added.

In a bid to soothe nerves, May’s Conservative government last week said it would temporarily slash most import tariffs in the event of a no-deal Brexit. In addition, Britain will not apply customs checks on the border with Ireland, albeit temporarily.
The new tariffs regime is aimed at avoiding both a jump in prices of EU imports for consumers and any disruption of supply chains. It is intended to last up to one year pending negotiations on a more permanent system. Under the proposal, 87 percent of imports into Britain will be eligible for zero tariffs, compares with the current level of 80 percent.

Britain’s economy is showing signs of holding up despite Brexit chaos, with unemployment at its lowest level in 44 years and wages growth outpacing inflation.

Official data yesterday showed that UK retail sales edged up 0.4 percent in February from January.
However, the pound is once more under pressure since May requested her delay on Wednesday.

Meanwhile, European stock markets mostly fell yesterday before a key Brexit summit in Brussels and an interest rate decision in London. Sentiment was partly hit after the Federal Reserve forecast overnight that it would not raise US borrowing costs this year-a shift from an earlier projection of two hikes-and cut its annual growth outlook.

Nearing midday, the London’s benchmark FTSE 100 index rose 0.5 percent, buoyed by news that official UK retail sales rose 0.4 percent in February from the previous month.

Yet the pound, seen as a barometer for Britain’s long-running Brexit saga, remained on the backfoot as no-deal fears continued to fester. In eurozone early afternoon trade, the Paris CAC 40 stocks index shed 0.2 percent and Frankfurt’s DAX 40 slid 0.5 percent, as uncertainty prevailed ahead of the hotly-anticipated Brexit summit.
British Prime Minister Theresa May was head back to Brussels Thursday on a last-gasp mission to beg EU leaders for more time to deliver a Brexit deal that was twice rejected by her own parliament.

She has written to EU President and summit host Donald Tusk to ask for the withdrawal date to be moved to June 30 from March 29.
Sands of time
“The latest EU summit will see the UK’s request for a short Brexit delay voted on by other members. France is playing hard ball; Germany more relaxed,” said Accendo Markets analyst Mike van Dulken.
“Expect more Westminster pontificating and blame-gaming.
“All the while the sands of time fall towards the pre-existing 29 March Article 50 deadline for which, without EU approval for an extension or Commons approval of the prime minister’s deal, the legal default remains a hard Brexit.”

BoE’s hands tied?
“Due to high Brexit uncertainty, the central bank is unlikely to make any policy changes today or offer any strong future guidance,” said London Capital Group analyst Jasper Lawler. “The UK is just eight days away from a no deal Brexit and an extension to Article 50 still has not been-and may not be-granted. As a result, the BoE’s hands remained firmly tied.

“We expect the central bank to touch on the severe economic consequences of a no deal Brexit.”
The dollar meanwhile struggled after a surprisingly dovish Federal Reserve indicated it would not lift interest rates this year and sounded a note of caution on the economy.

While the prospect of lower borrowing costs provided support to equity markets, investors were spooked as US President Donald Trump dented hopes for a quick resolution to the China-US trade talks by warning tariffs would stay in place for some time after any agreement is reached. – AFP