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--BOE Inflation Report Sees Gentle Tightening In Smooth Brexit
By David Robinson
LONDON (MNI) - The Bank of England could hike rates more quickly than
markets assume in the event of a smooth Brexit, according to projections in the
Bank of England's February Inflation report, even as Governor Mark Carney said
the risk the UK would leave the EU without a deal was rising.
The report's central projections - which assume a smooth transition to a
range of Brexit outcomes, excluding no deal -- showed inflation holding above
the 2.0% target on the market rate curve. This points to two 25-basis-point
hikes - rather than only one as markets are pricing in order -- to return
inflation to target.
Inflation on the CPI measure was projected to be 2.07% in two years' time
and 2.11% in three years on market assumptions that Bank Rate rises from its
current 0.75% to 1.1% by Q2 2021.
The MPC's projections have a patina of unreality as its convention is to
take government policy at face value. The administration is seeking a deal with
the EU with a transition period so the forecasts reflect that, but Carney
acknowledged that the risk of no deal was real.
"I'd describe a no deal no transition a few years ago as a low probability
event. I describe it now as not the central scenario ... (but) the probability
has gone up... the range of Brexit outcomes is very wide," Carney told a press
Even if there is an extension to the end March Brexit deal deadline, or if
parliament backs a deal, the MPC will likely continue to assume a smooth
transition to an indeterminate end state.
"Not everything may be tied up in a nice package by the end of March, and
there may still be some uncertainty about the ultimate direction," Carney said.
Uncertainty among households and businesses could persist for a while to
come. The BOE highlighted how business investment has turned negative as a
result of Brexit delaying decisions.
"There is upside if there is clarity on the deal sooner and we know the
direction we're headed sooner and there is a smooth transition to that
destination," Carney said, adding that the chances of a recession would rise in
a hard Brexit.
BOE agents and its rolling surveys underscored the impact of various Brexit
outcomes. Half of all businesses said they were not ready for no deal.
In 2020 alone reduced uncertainty and the associated looser financial
conditions could push GDP growth to 2.2% while greater uncertainty and tighter
financial conditions could cut expansion to 0.8%, compared to the MPC's central
forecast of 1.5%, the report said.
Carney stressed that the MPC had the freedom to chose to look through any
inflation shock from a hard Brexit, noting that "monetary policy reaction is not
automatic in a no-deal scenario."
--MNI London Bureau; +44 203 865 3829; email: firstname.lastname@example.org