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By David Robinson
     LONDON (MNI) - The Bank of England's January Inflation Report could ratchet
down estimates of the UK's potential growth, weakening the case for the monetary
easing expected by investors by early next year.
     SONIA benchmark rates price in a 34% chance of a 25-basis-point cut in
November, and fully price in such a move by March. The chances of a November
reduction in Bank Rate jumped from 19.5% on Sept. 26, the day before Monetary
Policy Committee member Michael Saunders said in a speech that policy easing
could be needed even if the country avoids a no-deal Brexit.
     High Brexit uncertainty is likely to persist no matter whether the UK
negotiates its exit from the EU, which, together with soft global activity,
might mean growth could remain stuck below potential, widening the output gap
and justifying easing, Saunders said.
     The BOE estimated the UK's potential for supply growth to have been around
an annual 1.5%, or 0.3 to 0.4% a quarter, following the Global Financial Crisis.
     This estimate might have to be reduced, Saunders noted, although he added
that interest rates might still have to be cut.
     UK's economy contracted by 0.2% in the second quarter and labour demand
softened.
     The BOE will revise its estimate of potential growth, along with those of
other equilibrium measurements, in next year's first Inflation Report. The more
this is reduced, the lower the margin for easier policy. Growth could also run
below even a lowered estimate of potential.
     Research by BOE economists and Stanford's Nicholas Bloom, published in
August, estimated that UK productivity may have fallen by anywhere between 2%
and 5% in the three years since the referendum vote to leave the EU.
     Worst hit have been higher productivity firms, which trade more with the
EU, as management devote more time to Brexit and investment grows more slowly.
     The Brexit shock seems to have had a more permanent impact than previous
episodes of uncertainty, although the research noted that, contrary to many
economists' expectations of a sharp fall in investment straight after the 2016
vote, this effect took three years to fully materialise.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
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