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--BOE F'casts Based On Unachievable Average Brexit Outcome: NIESR's Young
--NIESR Opts For Most Likely Outturn In Forecasts: Young
By David Robinson
LONDON (MNI) - The Bank of England will once again base its August
Inflation Report projections on a smooth transition to an average of Brexit
outturns, an outturn it knows cannot materialize, a former BOE advisor told MNI.
"The difficulty with the Bank's approach is that we can be pretty sure that
the final outcome will be one thing or another and not a mixture of possible
outcomes," said Garry Young, Director of Macroeconomic Modelling and Forecasting
at the National Institute of Economic and Social Research and a BOE veteran.
The BOE's approach to Brexit introduces an element of unreality into its
projections as the UK will eventually end up in one or another of the various
Brexit options and not in an average of them. Young, who until Sep 2017 worked
on monetary policy and modelling at the BOE, questions the central bank's
approach, suggesting outcomes could give skewed forecasts.
The Bank assumes that the UK moves in an orderly way through Brexit and
ends up trading with the EU based on the average of outturns ranging from World
Trade Organisation rules to a Norway style arrangement, where it would still be
part of the single market.
"By weighting on outcomes that may have little chance of happening it is
likely to be producing biased forecasts," Young said.
The risk is that the Bank's Monetary Policy Committee (MPC) will set policy
differently to what it would have done had it adopted differing methodology.
Since the BOE published its May Inflation Report the Brexit saga has
evolved, with the government publishing a White Paper setting out its preferred
Brexit outturn. This was for a free trade area for goods but with services trade
subject to the restrictions of an equivalence regime under which both the UK and
EU would have to be satisfied that their regulations achieved the same outcome.
NIESR on Tuesday published detailed analysis of the White Paper scenario
and compared it to a soft Brexit scenario. NIESR estimated a loss of around 2.5%
to GDP over 10 years under the White Paper scenario, with inflation markedly
higher, by on average 1.4%, due primarily to sterling depreciation.
The BOE will offer no comparable analysis when it publishes its projections
"By taking an agnostic approach it is able to get on with its job of
setting monetary policy without being castigated for conditioning its forecasts
on an assumption that will be anathema to some politicians and also potentially
wrong," Young said.
The proposals in the White Paper itself are widely expected to end up being
heavily modified in any final deal, with the EU putting pressure on the
government to choose between a softer Brexit than it envisages and no deal.
--OUTCOME REACTION UNCLEAR
Market participants, instead, will be left guessing over how the MPC will
react if a markedly softer Brexit emerges or if the UK crashes out with no deal.
"Market participants can draw on the Committee's track record of managing
the trade-off that emerged after the referendum .. the policy response would
reflect the balance of the effects of a sharper Brexit on demand, supply and the
exchange rate," Young said.
Following the June 2016 referendum the MPC opted to extend the period over
which inflation was expected to return to target in order to support jobs and
activity and there is an expectation it would do the same thing in the event of
a hard Brexit. Carney will again doubtless be questioned over Brexit, but he is
unlikely to shed any fresh light on it.
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