MNI POLICY: BOE On Hold; Sticks To Smooth Brexit Asssumption>

-BOE MPC Voted 9-0 For Unchanged Policy

-BOE Inflation Forecast Still On Smooth Brexit, Market Price Assumptions

     By David Robinson and Irene Prihoda                              

     LONDON (MNI) - The Bank of England Monetary Policy Committee (MPC) 

voted unanimously to leave policy on hold at its meeting ending July 31 

and in the quarterly Inflation Report stuck to its convention of 

assuming a smooth Brexit while using unadjusted market prices.

     In its central projections inflation significantly overshoots the 

2.0% target two and three years' out but the MPC highlighted the 

tensions created by basing its forecast on sterling and market rates 

that put a high probability on a cliff edge no deal while it excludes 

this option.

     It provided illustrations of how inflation and growth would look if 

there was a Brexit deal but did not provide any analysis of a no deal 

scenario.  

     The following are key points from the minutes, policy decision and 

Inflation Report:

     -The MPC added a new condition, that there needed to be "some 

recovery in global growth" to its guidance that, in the event of a 

smooth Brexit, limited and gradual interest rate increases would be 

needed. 

     The hurdle for progressive tightening appears to have been raised 

a little.

     -The central projection, based on unadjusted sterling and market 

rate expectations, showed CPI rising from 1.90% in one year's time to 

2.23% in two years and 2.37% in three years.

      Growth was shown at 1.43% in one year rising to 2.42% in two years 

and 2.50% in three. 

      The output was estimated at -0.25% currently and staying there 

until demand exceeds potential supply and the output gap turns positive 

to stand at 0.75% in Q3 2021 and 1.75% in Q3 2022.  

     -The MPC sketched out some illustrations of what would happen if 

the risk of no deal evaporated and sterling rallied strongly and Bank 

Rate rose gently, which supported very gentle tightening.

     The MPC expected that the output gap would still close and that 

there will be excess demand ahead, with inflation just exceeding target 

if there was a single 25 basis point hike. 

     -In its illustrations the MPC showed that a 25 basis point rate 

hike and a 5% rise in sterling on its effective rate index (ERI) would 

knock 0.3 percentage point off GDP growth in Q3 2020 and 0.4 points off 

inflation and 0.3 points off CPI in two and three years' time. 

     A 10% sterling ERI rise and a 50 basis point increase in Bank Rate 

would knock 0.6 percentage points off growth and 0.8% off CPI in a 

year's time and 0.7 point of CPI in two years' time and 0.6% in 3 years. 

     On these illustrations CPI would fall below the MPC's 2.0% target 

if there were two 25 basis point rate hikes, but be above at 2.1% in 

three years' time with one 25 point hike.  

     -The MPC did not offer any detailed analysis of no deal Brexit, 

leaving observers still in the dark over the likely response. 

     Some MPC members have said previously that easing was more likely 

than tightening in the event of no deal but the minutes stuck to the 

mantra that "the monetary policy response to Brexit ... will not be 

automatic and could be in either direction." 

     -London newsroom: e-mail: david.robinson@marketnews.com    

[TOPICS: M$B$$$,M$$BE$,MT$$$$]