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Risk-On Ahead July Employment Report

--MNI: Brexit Political Infighting A Sideshow For MPC's Aug Meet 
--No Change To BOE MPC Brexit Forecast Probabilities
By David Robinson
     LONDON (MNI) - It is extremely unlikely that the Bank of England's Monetary
Policy Committee (MPC) will alter the way forecasts the impact of Brexit in its
upcoming August Inflation Report, with the latest episode in the political soap
opera a side issue in the monetary policy debate, MNI understands.
     The latest bout of political infighting has raised the likelihood of either
a soft Brexit or no deal coming to pass. The MPC, however, will continue to base
its August projections on a smooth Brexit, averaging across the range of
plausible outcomes and, crucially, it will not alter the weights it attaches to
each scenario.
     The headline making drama over whether in coming hours any UK cabinet
ministers  resign or begrudgingly agree the contents of a Brexit negotiating
paper at their Friday meeting is noises off for the MPC.
     Since its August 2016 Inflation Report, the first after the June Brexit
vote, the MPC has conditioned its projections on a smooth path to the average of
a range of outcomes. What is has avoided doing is altering the weights it
attached to those outcomes in response to political news.
     The BOE's May Inflation Report stated that "As in previous Reports, the
MPC's projections are conditioned on the average of a range of possible
outcomes" for the eventual trading relationship with the European Union.
     While the MPC has not spelled out the precise scenarios and weights
attached to them, the line "as in previous reports" can be read as entailing
nothing changed on either front. It is fair to assume that, with the MPC
committed to enhanced transparency, if the Brexit assumptions were to be changed
then this would be made clear in the Inflation Report.
     It would be very surprising if the August Inflation Report, out on August
2, did not include a restatement of the same unchanged line on Brexit
     Prime Minister Theresa May is reported to be pushing a complex Brexit
hybrid proposal for an EU-UK single market for goods and a customs partnership,
with the latter adding to the complexity of any attempt to secure other trade
     This would, if it was acceptable in any form to the EU and cabinet
ministers, be viewed as pointing to a relatively soft Brexit but the approach
has triggered dissent from euro-sceptic Cabinet ministers, highlighting the risk
of no deal.
     Even if the MPC were to look again at how Brexit could influence future
policy, its conclusion would be that there is no simple read across to rate
     Ben Broadbent, Deputy Governor Monetary Policy, in his November 15 speech
last year noted the divergence between the pessimism of financial markets over
Brexit and the tendency of consumers to carry on regardless.
     "Until Brexit actually happens, its significance for inflation and interest
rates derives not so much from the process itself but from whether those
expectations move closer together or further apart ... it's hard to predict
which of these is more likely," he said.
     At the August meeting the MPC will proceed on the assumption of a smooth
Brexit, and that makes a rate hike plausible. Governor Mark Carney said in his
July 5 speech that in that scenario the MPC would aim to return inflation target
in the conventional 18-24 month period and that progressive tightening of
monetary policy would be appropriate.
     A footnote to his speech acknowledged that a disruptive Brexit would
complicate the situation and confront the MPC with trade-offs between jobs,
activity and inflation but that disruptive scenario will not be the MPC's
central scenario in August.
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |