MNI INSIGHT: BOE May Boost Hard Brexit Weight In Forecasts

--In August Forecast Round BOE Will Have To Decide If Assumption Of Smooth

Transition To Average Of Brexit Outcomes Is Obsolete

--With No Deal Rhetoric Dominating Conservative Leadership Battle Current BOE

Brexit Forecasts Look Dated

By David Robinson

     LONDON (MNI) - The Bank of England's Monetary Policy Committee will

consider placing more weight on the possibility of a hard Brexit in its August

forecasting round, in a move which could sap its growth outlook while pushing up

its inflation projections, MNI understands.

     As candidates to succeed Prime Minister Theresa May as leader of the

governing Conservatives vie to woo a heavily Eurosceptic party membership,

officials have acknowledged that BOE forecasts which, since the 2016 referendum,

have been based on an average of possible negotiated UK exits from the EU, are

diverging from market expectations.

     This means that, with investors pricing in the risk of No-Deal, speeches

such as that by Committee-member member Michael Saunders earlier in June setting

out the case for raising Bank Rate in the event of a smooth Brexit can sound

detached from reality.

     If the MPC opts to adjust its methodology, it could place greater weight on

the likelihood of No-Deal, by, for example, producing a forecast based on a

50-50 blend of a scenario including a withdrawal agreement but no final

agreement with the EU, and an average of soft Brexits. It could also publish

individual forecasts for different scenarios, although the MPC has repeatedly

shied away from this potentially politically awkward course of action in its

quarterly Inflation Report projections.

     Allowing for the possibility of No-Deal would, almost inevitably, weigh on

the Bank's fan-chart growth forecast, as well as push up its inflation

projections.

     In comments to the Treasury Select Committee Tuesday, Deputy Governor Ben

Broadbent downplayed the significance of any misalignment between market and

Bank assumptions

     "I am not greatly concerned that the market should match exactly, and at

all times, what might be the optimal forward path of interest rates within the

central bank's forecast," Broadbent said, when asked if the MPC now had a policy

communication problem. Such an argument could potentially be used to justify no

forecasting methodology change from the MPC.

     "I think the markets understand them (the forecasts) very well. That

doesn't mean they have to agree with everything in the forecast," he said.

     The Bank's forecasts show inflation overshooting its target based on a very

gently rising rate path, while money markets are not fully pricing in a hike

through 2020 and putting around a 40% chance on a cut.

     By the time of its Nov. 7 meeting the MPC will know whether the UK has left

the EU with no deal, but in August uncertainty over Brexit is likely still to be

high. So the question is whether the MPC decides it is worth changing

assumptions for a single forecast round.

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

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