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--Strong Case For BOE To Move To Tighter Brexit Forecast Range
--BOE Could Exclude Close EU Alignment Option From Range Of Outcomes; Lowering
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
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.
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
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com