MNI INTERVIEW: BOE, OBR Should Consider Brexit Scenarios: Bean

--Ex BOE Deputy Governor, Top OBR Official Bean Sees Case For Exploring Brexit

Scenarios

--Highlights Tensions Between Forecasts Based On Smooth Brexit And Market Prices

That Include No Deal

By David Robinson

     LONDON (MNI) - The Bank of England and the UK's official fiscal forecaster

should consider providing analysis of alternative Brexit scenarios along with

upcoming projections, as uncertainty over the country's exit from the European

Union broadens the distance between assumptions used in their current

forecasting and market bets, top OBR official Sir Charles Bean told MNI.

     The BOE by convention, and the Office for Budget Responsibility by law,

produce single central projections based on stated government policy, which is

currently to secure an agreement with the EU on Brexit, but these projections

include asset prices and market rate curves that are putting substantial weight

on no deal. Bean, a former head of the BOE's monetary policy wing, said he saw a

case for adding scenario analysis and extra text to explore alternative

scenarios.

     The topic is a hot one, with the BOE working on its August Inflation Report

projections and press reports of an emergency pre-Brexit budget, which would

force the OBR to come up with another set of forecasts.

     "There is a real trickiness because you are constructing a forecast

conditioned on a stack of assumptions which include market prices. And if market

prices are conditioned on a different set of assumptions there is inherently a

tension," Bean said.

     The BOE Monetary Policy Committee, in its quarterly forecast rounds, has so

far conditioned its forecasts on a smooth transition to the average of a range

of Brexit outcomes, excluding both the possibilities of a disruptive no deal or

of the UK's remaining in the EU, but market participants are placing a high

probability, often around 40%, on no deal.

     The two remaining candidates to be leader of the governing Conservative

Party and, consequently prime minister, have both said they want a Brexit deal

and will seek to renegotiate one but with the Oct. 31 deadline looming the risks

are high and it is unclear what parliament will approve.

     --PROBABILITIES IMPOSSIBLE TO ASSESS

     "This is stuff that we can't put probabilities on and it is stupid for us

to claim that we can," Bean said.

     "No deal, and getting there, just involves all sorts of political events,

questions about how people respond to that for which there is no basis

whatsoever in attaching probabilities," he added.

     Under these conditions producing a single central forecast will not answer

market participants questions about what is likely to happen to fiscal or

monetary policy.

     "Actually scenarios are about the only useful thing you can talk about,"

Bean said.

     Press reports have claimed that likely next Prime Minister Boris Johnson

favours an emergency budget in September, but if Johnson states that he wants a

Brexit deal, the OBR has to forecast on that basis.

     "It is pretty clear what the principles are. We are supposed, by law, to

produce a central forecast conditioned on the government's stated policy," Bean

said.

     The trickiness for the OBR is that not only are asset prices partly

factoring in no deal, as demonstrated by the recent decline in sterling, but so

could business and consumers.

     "Just going back to the generic point there is this fundamental tension

between the assumptions that might be in the forecast and the assumptions that

might be in expectations. Actually it is not just market expectations, we also

include private agents' expectations," Bean said.

     The OBR in its Fiscal Risks report out Thursday, which generated news

headlines about a stg30 billion cost of no deal, assumed that the BOE would cut

the policy rate from its current 0.75% to 0.2% in the event that the UK leaves

the EU without an agreement.

     Bean says that this scenario is based on the assumption of a bigger hit to

demand than supply and that the MPC would look through an inflation blip caused

by sterling depreciation. But this is not the only plausible outcome.

     The alternative is that with political uncertainty at its zenith investors

may start doubting the reliability of UK institutions.

     "Under those circumstances the Bank of England might feel that they are not

in a position to be able to look through a fall in sterling. They might, in

those circumstances, have to prioritise the fall in the pound," Bean said.

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

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