MNI INSIGHT: Brexit Deal May Prompt Gloomier BOE Forecasts

--Strong Case For BOE To Move To Tighter Brexit Forecast Range

--BOE Could Exclude Close EU Alignment Option From Range Of Outcomes; Lowering

Growth

By David Robinson

     LONDON (MNI) - The UK government's deal with Brussels on withdrawing from

the EU means the Bank of England will probably assume a narrower and gloomier

range of possible Brexit outcomes when it draws up its next economic forecasts

in November, by prompting it to exclude the possibility that the UK will retain

a very close alignment to the bloc.

     Since the 2016 Brexit vote the Bank's forecasts have been conditioned on

the government's stated policy of securing a deal and a smooth transition to an

average of possible end states ranging from a very close relationship with the

EU to a distant third party set up. Prime Minister Boris Johnson's agreement,

reached with the European Commission and now subject to parliamentary approval,

is for a free trade deal but no continued membership of the single market or

customs union.

     The BOE did not publish details of its Brexit scenarios in its August

Inflation Report, but these were averaged to produce central forecasts for GDP

growth of 1.3% in 2019 and 2020. The Bank saw growth picking up to 2.3% in 2021

as Brexit uncertainties fade.

     The BOE has never included the possibility of a disorderly departure from

the EU in its scenarios, because its forecasts have to be based on the

assumption that government policy will be implemented, and government policy has

been to secure a deal. In contrast, investors have had to factor in the risk of

a no-deal Brexit. Now that this risk has been reduced, the BOE's forecasts will

be more closely aligned with market assumptions.

     --POSSIBLE COMPLICATIONS

     The political process could still produce complications for the BOE as it

prepares forecasts for its Nov. 7 Inflation Report. If, for example, parliament

were to vote in favour of adding a customs union to the EU Withdrawal Bill, the

Monetary Policy Committee would be left with a tricky judgement call over what

stated government policy was.

     When PM Johnson's predecessor, Theresa May, struck an earlier ill-fated

deal with the EU last year, the Bank published analysis spelling out how a close

partnership would be better for growth than the average end state, and that it

could add up to 1.75 percentage points over a five-year period to the Inflation

Report projection. A less close economic partnership could knock up to 0.75% off

GDP over the same period.

     BOE Governor Mark Carney, in remarks to the BBC Saturday, said that May's

deal appeared to contain more benign possible outcomes than Johnson's.

     While no one can know "exactly what would be negotiated under this

(Johnson) deal in the end. I can tell you that my judgement would be that there

is some overlap between the two (but) if it were the deepest possible

partnership under Prime Minister May's deal, there wouldn't be overlap," Carney

said.

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

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