MNI INSIGHT: BOE May Put "Dark Scenario" In Stability Report

The Bank of England may outline thoughts on the economic impact of a resurgence of the Covid-19 pandemic on Thursday, but this "dark scenario" may only feature in its Financial Stability Report, distancing it from the rates decision revealed in the Monetary Policy report which would include an updated central forecast assuming a smooth return to normality.

While fears of a viral flare up and renewed economically painful lockdown measures are rising, producing a forecast around its impact would involve making politically uncomfortable assumptions on matters such as the potential fiscal response, just as key government support measures are due to expire in October. Tucking the "dark scenario" away in the lesser-read Financial Stability Report might be one way of revealing the Bank's thinking while limiting the association with the regular rates decision.

This would not be without precedent. As financial stability scenarios are used to test the resilience of the financial system, they have previously contained implausible assumptions such as spike in Bank Rate to offset inflation after a hard Brexit.

DARK SCENARIO

A dark Covid scenario could be based on a more plausible assumption, with Bank Rate stuck at its lower bound, but still be strong enough to meet the challenge of testing resilience at commercial banks.

The Bank produced a single scenario for both publications at the last release in May, with work-from-home staffers coming up with an outlook that assumed a gradual re-opening of the economy, albeit hampered by consumers' voluntary social distancing. It was, by the standards of the Bank's usual projections, pretty thin gruel, lackeding consideration of the probabilities of different risks.

Since then the economy has, as Monetary Policy Committee members Andy Haldane, Silvana Tenreyro and Jonathan Haskel have acknowledged, outperformed that scenario.

But, if the Bank were only to publish a slightly more upbeat version of May's single scenario it would risk looking instantly redundant. Recent news headlines have highlighted the partial postponement of easing measures and localised spikes in Covid-19 infection rates. Haldane has said that with the economy facing sharply divergent paths publishing scenarios makes sense.

Individual MPC members are clearly far from wedded to the May scenario, with Haskel in an end-July speech saying that evidence indicates that fear of infection appears to be a key determinant of consumer behaviour.

Publishing various unweighted scenarios alongside each other in both the MPR and FSR would, however, run the risk of a communications debacle, with policymakers perceived to be simultaneously predicting relatively benign and far more malign outturns. A prudent sequestering of the scenarios in different reports may avoid such problems.