MNI ANALYSIS: BOE To Hold As Brexit Sidelined

-Brexit Risks Centre Stage But MPC's Sep Meeting Will Steer Around Them  

By David Robinson

     LONDON (MNI) - The Bank of England's Monetary Policy Committee is set to

leave policy on hold at its September meeting, as it waits to see how earnings

growth and inflation respond to its August rate hike.

     While the range of medium-term economic scenarios varies wildly according

to whether the government clinches a withdrawal agreement with the EU ahead of

the UK's departure from the bloc in March, the MPC will proceed next Thursday on

the assumption that a deal will be secured.

     The MPC hiked Bank Rate 25 basis points in August and members are in no

rush to make the next move.

     "It is prudent to let the effect of the last move sink in and continue

monitoring the evolution of the economy," MPC member Silvana Tenreyro told the

Treasury Select Committee Tuesday.

     Average weekly earnings growth is running at about 2.7% -- in line with

Bank forecasts - and Tenreyro sounded bullish on the earnings outlook at the

TSC.

     The labour market "is extremely tight right now ... companies are reporting

difficulties recruiting and retaining staff ... That has translated into a

pick-up in wages and, given the low productivity, that is pressure on unit

labour cost and unit wage costs," she said.

     The September meeting will be the first for Jonathan Haskel, who in his

confirmation hearing with the TSC cited structural reasons why wage pressure may

be relatively weak.

     These included the reduced bargaining power of workers and the growth of

part-time work. As he replaces Ian McCafferty, who led the way in pushing for a

hike, Haskel may add a dovish tinge to the September minutes.

     But, in eschewing analysis of the implications of alternative Brexit

scenarios, the MPC will be left following its convention of looking at the

likely economic outturn based on average of Brexit outcomes - a scenario that

can never materialize.

     In reality, the future path of policy setting will bifurcate dramatically,

with the MPC set to proceed with a gentle tightening if the Brexit process runs

fairly smoothly whereas members would face a tough trade-off between tolerating

higher inflation and supporting activity if negotiations fail.

     The timetable is tight for the UK and the EU to agree a withdrawal

agreement, on which a transition period after Brexit depends.

     The question of how the MPC would respond of no deal dominated Tuesday's

TSC hearing.

     "What we are seeing is still an economy that by and large is operating as

if there will be some form of agreement and certainly some form of transition,"

Carney said.

     "From the MPC's perspective, until something considerably changes and no

deal moves to be the central scenario and households, businesses and financial

markets start acting that way, one would not expect to see us adjust our

forecast and certainly our orientation of policy," he added.

     All analysts expect a nine-to-zero vote for no change in policy, with the

announcement out at 1100 GMT Thursday.

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

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