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MNI INSIGHT: BOE Set To Sketch Out Brexit Scenarios In Report

By David Robinson
     LONDON (MNI) - The Bank of England is likely to sketch out scenarios for
different Brexit outcomes in its August Inflation Report, but hold off from
providing full-blown, detailed forecasts for the economic fallout of a UK exit
from the European Union without a deal, MNI understands.
     Such scenarios would accompany but lack the detail of the Bank's central
forecast, which has until now assumed an average of possible negotiated
withdrawals from the EU, people familiar with the BOE's workings told MNI.
     Bank officials have become increasingly concerned that their central
forecast, which has to assume a negotiated deal because this is stated
government policy, has diverged from market expectations, as investors price in
a rising probability of a so-called hard Brexit, a tendency which has only been
exacerbated since Boris Johnson took over as prime minister earlier in July.
     This divergence detracts from the ability of the central forecast to act as
a guide to the Bank's thinking as it sets monetary policy. But providing a
series of parallel forecasts for different scenarios would also be problematic:
not only would it potentially drag the Bank into political debate, but it would
also run the risk of confusing investors, officials fear.
     Former BOE Deputy Governor Sir Charles Bean told MNI in an interview last
week that in current circumstances "scenarios are about the only useful thing
you can talk about," as there was no basis for attaching probabilities to the
kind of political events involved in Brexit.
     Some analysts have speculated that the Bank's Monetary Policy Committee
might simply adjust its forecasts for the sterling exchange rate to allow for
different Brexit outcomes, in a similar way to that in which it dealt on what
was then the upcoming referendum on EU membership in its May 2016 Inflation
Report. But Garry Young, who spent 17 years at the BOE and now leads the
National Institute of Economic and Social Research's work on macroeconomic
modelling and forecasting, pointed out that this time not only currency markets
but also interest rate futures are pricing in a high probability of No Deal.
     "It is difficult to disentangle these effects, but to do it would require
different exchange rate and interest rate profiles. So I don't think it would
make much sense to adjust only the exchange rate path," he told MNI.
     Another possibility might also be for the Bank to put aside any attempt to
incorporate market rate expectations and to highlight a forecast based on an
assumption that rates will remain unchanged.
     BOE Chief Economist Andy Haldane acknowledged the problem of the divergence
between the Bank's forecasts and market expectations in response to a question
from MNI following a speech last week.
     "The exchange rate has gone down, interest rates have gone down and that
risks a disconnect, a tension between the assumptions we make when we put the
forecast together ... and the reality of the situation," he said.
     But Haldane was guarded about which approach the MPC would use to help
reconcile those tensions, saying that it would explore "the sensitivities
around" its forecasts.
     Whatever the MPC does with its forecasts, it risks being overtaken by
events. It only incorporates asset prices and rate expectations for the 15
working days ending in the week before publication, meaning that this week's
slide in sterling, prompted by tough No Deal talk emanating from the government,
will not be factored in.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]

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