MNI ANALYSIS: BOE MPC Policy Driven By Data, Not Brexit Talks

--Ups, Downs Of Brexit Transition Negotiations Sideshow To MPC Debate 

By David Robinson 

     LONDON (MNI) - Bank of England policymakers will view the continuing ups

and downs of Brexit negotiations as a sideshow, with Monetary Policy Committee

members encouraging financial market participants to focus on the economic data

flow instead.

     Absent a spectacular and seemingly insurmountable breakdown in Brexit

talks, the MPC's decision whether to hike in May will be determined by the

likelihood of excess demand over its three year forecast period and inflation

staying stuck above target.

     Markets are anticipating a Brexit transition deal will be struck between

the UK and the European Union next month, when the European Council meets on Mar

22 and 23, allowing the UK at least until end 2020 before it moves to new

trading arrangements with the EU.

     "That is the central expectation of markets and we have that through market

intelligence, we can see it in options prices," Carney told lawmakers on the

Treasury Select Committee Wednesday.

     Asked what would happen if a deal did not materialize next month, Carney

pointed out that this question covered multiple scenarios. A deal could simply

be delayed to thrash out technical details and markets and business would adjust

accordingly.

     --NO DEAL UNLIKELY

     The chances of the UK and EU accepting no transition deal can be done

appear to be vanishingly small as, at worst, if talks do breakdown they would

just start again at a later date.

     The Bank's quarterly growth and inflation projections are insulated to a

degree from the ebb and flow of the Brexit process. 

     The May Inflation Report round will once again use the forecasting

convention that Brexit will be a smooth, prolonged process resulting in an end

state which is the average of plausible outcomes. These range from UK/EU trade

becoming reliant on World Trade Organisation rules to the UK gaining

comprehensive goods and services access.

     The agreement, or postponement, of a transition deal will not alter these

assumptions. What would matter for the Bank forecasts is if there is a material

change in asset prices, or business or consumer behaviour shows signs of

changing substantially in response to the Brexit news. 

     While Brexit uncertainty has, so far, dampened business investment Carney

noted that it has not had a material effect on consumers, who continue to

consume out of current income.

     A transition deal may go someway to reducing Brexit uncertainty for

business, but with the end state still unknown uncertainty would likely remain

elevated and the experience to date suggests transition talks will largely pass

consumers by. 

     That leaves forward looking financial markets as the main responders to

Brexit news, and they are already factoring-in a deal.

     --DATA DRIVEN

     BOE Deputy Governor Ben Broadbent has been driving home the message that,

in any event, there is no simple read across from Brexit developments to

monetary policy. If sterling were to fall and investment to decline on the back

of perceptions that a hard Bexit was more likely, that could strengthen the case

for a  hike if consumption held up, while increased chances of a soft Brexit

could conversely boost sterling and the supply side and ease inflation pressure.

     Policymakers want market participants to respond to data flow, rather than

assuming the MPC will delay tightening due to Brexit concerns, and they are

encouraged that while it was a struggle for much of last year to get markets to

take the prospect of a hike seriously, markets now seem to accept that further

tightening will happen if the data support it.

     "Something else that has changed in the last few months is that there has

been more sensitivity to economic news and a rise in volatility ...which is

welcome," Broadbent told the TSC.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]