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#BankOfEngland turns to quick-fire data to help with #Brexit dilemma

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The Bank of England (BoE), preparing for a possible no-deal Brexit, is trying to harness reams of real-time digital data on traffic jams, card payments and shipping in case it has to make a snap decision to raise or cut interest rates, writes William Schomberg.

The BoE typically has plenty of time to think about its next steps for the world’s fifth-biggest economy. It announces its rate decisions every six weeks or so after studying established economic indicators, many of which take weeks to prepare.

But it might have to move much more quickly if Britain leaves the European Union without a deal to cushion the shock, a real prospect for later this year with Prime Minister Theresa May struggling to break a Brexit impasse in parliament.

BoE Chief Economist Andy Haldane said last week the central bank was monitoring data on road congestion around major ports, collected from Google Maps, as part of a push to improve its real-time understanding of the economy ahead of Brexit.

As well as traffic jams at ports, officials are looking at shipping and aircraft flows and financial transactions data. They are also speeding up their scouring of Google and Twitter to try to get a more up-to-date feel for the mood of consumers.

Crucially, the BoE’s number-crunchers want to know which micro-level data they can trust, and which tend to send misleading signals.

Shortly after the Brexit referendum in 2016, surveys of companies flashed warning signs that the economy was nose-diving, prompting the BoE to cut interest rates to a record low and ramp up its massive bond-buying program.

But the economy — in particular, spending by consumers — largely weathered the shock, raising questions about whether the BoE should have acted more cautiously.

In a speech at the University of Sheffield on May 7, Haldane said monetary policymakers might be able to put more trust than in the past in so-called high-frequency data, some of which is now being published by Britain’s official statistics office.

In other fields, errors in weather forecasting have been halved in a generation and digital data and new ways of modeling were helping scientists to understand how oceans, the internet and galaxies work, he said.

“Until recently, fewer such high-resolution data existed when it came to tracking flows of goods and services, people and money through our economy. That is changing,” Haldane said.

The BoE has said there would be no automatic reaction to cut or raise interest rates after a no-deal Brexit.

On the one hand, consumers and businesses might cut back on spending, hurting growth and making the case for a rate cut.

But the pound is likely to tumble, pushing up import prices and inflation, normally arguing for higher interest rates.

As part of its dig into the data, the BoE is trying to pull apart the price chain for imported goods from the moment they enter Britain to when they go onto the shelves.

That could give policymakers a better sense of what kind of short-term inflationary hit they could expect from any tariffs on imports from the EU, and what the impact on supply chains could mean for inflation in the future.

The BoE usually looks at 40 components of Britain’s consumer price index, but it could peer deeper into the price chain to get a more a detailed sense of potential inflation pressures.

Any clues from digital readings are unlikely to lead to an overhaul of how the BoE tracks the economy. But Haldane said there was real potential from the data thrown up by payments systems and corporate and public sector information systems to track workers, goods and services.

“These micro-level data could, with time, be pieced together to provide a macro — or micro-to-macro — model of the economy. Or that, at least, is the promise,” he said.

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Irish foreign minster says EU-UK trade deal breakthrough possible

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There is a window of several weeks for Britain and the European Union to reach a breakthrough in trade talks before Britain’s upper house of parliament considers the contentious Internal Market Bill, Ireland’s foreign minister said, writes Conor Humphries.

“I believe there is a window for negotiations that I hope the two negotiating teams, in particular the UK, will take in terms of giving the signals that are necessary to move this process into a more intensive phase,” Simon Coveney (pictured) told parliament. “It is possible to get a deal here.”

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As Brexit talks intensify, banks see sharply higher risk of no-deal exit

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The chances of Britain leaving the European Union without a trade deal have risen dramatically in the last three months, according to major investment banks, most of which now see the probability of such an outcome at 50% or higher, writes Elizabeth Howcroft.

Britain left the EU in January but is currently in a status-quo transition period, which ends on 31 December irrespective of whether or not a deal is agreed. On Monday (28 September), the two sides started a decisive week of talks, with one diplomat noting an improvement in “mood music”. But all six banks which participated in a Reuters poll in June are more pessimistic, with most citing UK legislation that would breach parts of the withdrawal agreement signed with the EU in January. The move has drawn threats of legal action from the EU.

The most dramatic re-assessment was by Societe Generale, which said the bill “gravely damaged” trust. The probability of no-deal now stands at 80%, according to the bank, which had assigned a 17% chance in June.

Germany’s Commerzbank, meanwhile, puts the probability of no-deal at slightly below 50%, versus 10% in June, a scenario which strategist Thu Lan Nguyen warns could hit the pound hard, possibly resulting in depreciation of “something around 10%”. The currency has fallen around 5% this month but with three months still to go before the transition period expires, options markets are pricing in more volatility ahead.

ING now believes the risk of no deal is 50%, up from 40% three months ago. Only a small proportion of this risk premium is priced by sterling, according to economist James Smith, who sees the currency possibly heading towards parity versus the euro.

In a more detailed forecast, Standard Chartered stuck with a one-in-two chance of an agreement by the end of the year but also saw a 20% chance of the transition period being extended and a 30% chance of exiting without a deal. JPMorgan, not included in the Reuters poll, expects the worst-case outcome to wipe at least three percentage points off UK gross domestic product in 2021. It puts the risk of no-deal at one-in-three but told clients that “with brinkmanship part of the process it may appear higher than that before agreement is reached”.

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EU negotiators willing to work on legal agreement with UK - The Times

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European Union negotiators have signalled that they are willing to begin work on a joint legal text of a trade agreement with the UK, ahead of trade talks that resume on Tuesday, The Times reported on Tuesday (29 September), writes Rebekah Mathew in Bengaluru.

EU chief negotiator Michel Barnier is ready to begin work on a joint draft version of a free trade agreement, known as a "consolidated legal text", this week, the newspaper reported.

Barnier expects Britain’s chief negotiator David Frost to provide more details of fishing quotas and the government’s future subsidy policy, the Times report said, adding that EU has also backed away from a threat to suspend trade and security talks.

Britain left the EU last January and is locked in negotiations on a new trade deal from 2021, as well as on implementing the divorce, as set out in the Withdrawal Agreement, especially on the sensitive Irish border.

Trade talks resumed in Brussels on Tuesday. Lasting until Friday (2 October) morning and also due to cover energy links and transport, they are the final round of negotiations scheduled so far.

Brussels have dropped its demands for the two sides to reach a broad agreement on all the outstanding areas of dispute before drafting a final agreement and expects UK to engage in detailed discussions on post-Brexit fishing quotas and the government’s future subsidy policy, the newspaper said.

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