Carney steps into the Brexit breach again

By Padraic Halpin

DUBLIN (Reuters) – Brexit worries are set to dominate the coming week, with Bank of England Governor Mark Carney stepping into the policy breach once more as Britain begins a two-month wait to find out the identity of its next Prime Minister.

Data from the United States and China will meanwhile give an indication of how the world’s top economies were placed on the eve of Britain’s shock June 23 vote to quit the European Union.

The referendum result has thrust Britain into its worst political crisis of modern times and raised fears about global growth and stability that have roiled financial markets.

Casualties include Italy’s banks, whose 360 billion euros of bad debt is one-third of the euro zone total. Their shares are down almost 60 percent this year, with selling having accelerated after the Brexit vote.

Rome is negotiating desperately with Brussels over a plan to recapitalize its lenders with public money, limiting the losses for bank investors which are required by EU rules.

Seen as a steady hand amid the political chaos, Carney has suggested interest rate cuts and more stimulus are likely from the Bank of England, whose Monetary Policy Committee meets on Thursday.

A Reuters poll on Tuesday suggested policymakers would wait until August to make any move but with data on Friday showing consumer sentiment slumping, and fears of a recession rising, the Bank runs a risk of disappointing markets.

“A plunge in consumer confidence and evidence of markedly reduced business sentiment has enhanced the case for interest rates to be cut as soon as Thursday,” said Howard Archer Chief UK & European Economist, IHS Global Insight

“The only question really seems to be exactly what action will the MPC take?”

Nearly two-thirds of the 52 economists Reuters polled said the rate would be held steady at 0.5 percent at next week’s meeting. Seventeen predicted a cut to 0.25 percent and another two said rates will be chopped to zero next week.

Asked more broadly how the BoE was likely to respond to Brexit, a majority of economists who answered the question thought a combination of lower rates and more asset purchases was likely.

The Bank began to act by scaling back capital rules for banks in the hope of spurring more lending, and changing rules for insurers to lower the risk of a corporate bond sell-off.

Other policy meetings this week include the Bank of Canada, which is not expected to hike rates for at least another year amid increased economic headwinds, not least from Brexit.

AND THE FED?

While Carney will have a much firmer idea of the referendum result’s impact on the economy by August’s meeting, assessing the collateral damage beyond Britain could take a little longer.

The release of second-quarter economic growth data for China on Friday, alongside June industrial production, retail sales and investment numbers, will give a comprehensive picture of the world’s second-largest economy pre-Brexit.

Another Friday data dump, this time in the United States, will provide June readings for retail sales, inflation and industrial production, while the Michigan consumer confidence survey due on the same day will include post-Brexit sampling.

U.S. job growth surged in June as manufacturing employment increased and non-farm payrolls posted their largest gain since last October, providing more evidence the economy has regained speed after a first-quarter lull.

Tepid wage growth and the Federal Reserve’s desire to wait on more data to assess the economic impact of Britain’s stunning vote to leave the EU, should see the U.S. central bank remain cautious about hiking interest rates.

“If it turns out that U.S. jobs growth is on track, and that U.S. households seem largely unperturbed by Brexit, that could offer succor to markets, while leaving on track our call that the Fed will still squeeze in a rate hike this year,” said Investec economist Chris Hare.

(Editing by Catherine Evans)