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--Ex BOE Deputy Governor, Top OBR Official Bean Sees Case For Exploring Brexit
--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
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
"Actually scenarios are about the only useful thing you can talk about,"
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
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: email@example.com