MNI POLICY: BOE Says Rate Hikes Likely If Brexit Deal

By David Robinson And Irene Prihoda

     LONDON (MNI) - The Bank of England sketched out scenarios indicating rate

hikes are likely if the UK agrees a negotiated exit from the EU, but cut its

growth forecasts and held off after its meeting ending July 31 from outlining

its thinking ahead of a potential cliff-edge no-deal Brexit.

     In its August Inflation Report, the Bank stuck to its convention of basing

central growth and inflation projections on a smooth Brexit. It adjusted neither

its sterling nor its market rate conditioning assumptions to align them with a

smooth Brexit, giving an air of unreality to its forecasts at a time when

markets have been factoring in a rising likelihood of no deal ahead of the Oct.

31 deadline for the UK to leave the EU.

     Instead, the BOE provided, alongside its central forecast, a sketch of how

it might respond to a deal being struck. One or two 25-basis-point increases in

Bank Rate could be justified in such a case, even if sterling strengthened

substantially, its illustrations showed.

     Asked if policy easing was more likely than tightening in the event of no

deal, Governor Mark Carney said: "The committee has not given a collective view

on that, so it would not be appropriate for me (to do so)."

     The Monetary Policy Committee's agreed line remained that policy could move

in either direction in such a scenario, and Carney stressed that a no-deal

Brexit would result in both a supply and demand shock.

     Individual members, including Carney himself, Jan Vlieghe and Silvana

Tenreyro, have said easing is more likely than tightening if there is no deal,

but deputy governors Ben Broadbent and Dave Ramsden have previously declined to

endorse this view and the committee has not reached common ground.

     --NEGOTIATED BREXIT SCENARIO

     The MPC minutes and Inflation Report were more forthcoming on what would

happen if sterling and market rates moved higher in the event of a deal.

     A 10% rise in sterling's effective rate index and a 50-basis-point hike in

Bank Rate, feeding through to higher gilt yields, were shown knocking 0.7

percentage point off inflation, pushing it down to 1.8% in three years, compared

to the central forecast of 2.37%.

     The illustrations suggested that one hike may be a sufficient response if

sterling were to rise more than 5%. A 5% rise in sterling and a 25-basis-point

hike would knock 0.3 point off CPI in three years, taking it down to 2.1%, just

above the target.

     The MPC added a line to its guidance that limited and gradual rate hikes

were likely but that this would also need "some recovery in global growth," even

in the event of a smooth Brexit.

     The growth forecasts in the central projection were cut to just 1.3% in

2019 and 2020, from 1.5% and 1.6% in the May forecast, with quarterly growth

shown flat in Q2 but rising to 0.3% in Q3.

     The MPC has one more meeting, ending Sept. 18, before the Brexit deadline.

Carney was pushed at the press conference on whether the MPC would provide more

guidance to the public ahead of the deadline.

     He said that the MPC did not need a full new set of forecasts, which are

produced for the quarterly Inflation Reports.

     At the press conference Carney was speaking on behalf of the committee and

in coming days and weeks individual MPC members are likely to set out their own

views.

     Carney acknowledged fiscal policy would have a key role to play in the

event of a no-deal Brexit. For now, monetary policy is looking sidelined.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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