MNI POLICY: BOE Scenario Is Rosy, But Alternatives Too Complex

-BOE Has No Comprehensive Alternatives To Benign Scenario

-Reviews Policy Toolbox: More QE Most Likely First

By David Robinson

     LONDON (MNI) - The Bank of England will likely be challenged by lawmakers

later Wednesday over the Monetary Policy Committee's benign economic outlook for

the next 18 months, with bank officials thus far unwilling -- or unable -- to

provide forecasts for a wider range of outcomes for the Covid-19 driven

downturn.

     BOE Governor Andrew Bailey and colleagues will appear before the Treasury

Select Committee and will inevitably face questions about MPC's May Monetary

Policy Report scenario which implicitly assumed that the government policy of

suppressing the spread of Covid-19 and gradually easing the lockdown will work,

resulting in a rapid economic rebound in 2021.

     To date, the Bank has not developed alternative scenarios and the TSC will

likely examine why - and then push BOE officials to offer up forecasts or

outlooks for a slower recovery and less rosy outlook.

     --POLICY DRIVEN

     As seen through the Brexit years, the BOE models its assumptions based on

current government policy and is doing the same now. However, as its fan charts

published quarterly suggest, there is normally a range of outcomes offered up.

These are absent at the moment.

     If the Bank were to develop a scenario in which the government's strategy

is unsuccessful it would have to choose from several alternatives, including a

second wave, virus mutation and failure to restart the economy despite lifting

of restrictions. All these options would leave the BOE's forecasters then having

to make assumptions over government reactions - at a time when staff are working

remotely with limited resources.

     -NEGATIVE RATES NOT IMMINENT

     Almost dismissing the BOE's upbeat outlook for 2021, largely seeing a

'V'-shaped recovery that sees much of this year's economic damage recovered,

speculation has intensified in financial markets that the MPC could cut rates

from the current 0.1% to negative.

     Policymakers have certainly offered some encouragement to the theory at

least, with MPC member Silvana Tenreyro saying Monday European experiences

suggest "negative rates have had a positive effect in the sense of having a

fairly powerful transmission to real activity".

     There has, though, been plenty of comment suggesting it's not currently an

option, with chief economist Andy Haldane recently telling the Sunday Telegraph

that the Bank was not poised to do anything.

     Bailey, however, has stressed the challenge of communicating the case for

negative rates and ensuring financial institutions will be able to handle them

without cutting back on lending.

     The Bank has already lowered its estimate of the effective lower bound or

reversal rate, the point at which a rate cut would be contractionary not

expansionary, from 0.5% at the time of the global financial crisis to 0.1% now.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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

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