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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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