MNI POLICY: BOE Sees CPI Above Target If Bank Rate Up To 1.4%>

--BOE Forecasts CPI Staying Above Target; MPC Unch Policy Vote Unanimous

     By David Robinson     

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

voted unanimously to leave the policy rate unchanged at 0.75% at its 

November meeting while the Inflation Report (IR) projections showed the 

consumer price index overshooting the 2.0% on market rate assumptions 

for Bank Rate to rise to 1.4% over three years. 

     The following are the key points from the IR and minutes of the 

November MPC meeting: 

     -The November IR was more hawkish than its August predecessor. The 

central inflation forecast in the November report was conditioned on 

Bank Rate rising from its current 0.75% to 1.0% in the fourth quarter of 

2019, 1.2% in Q4 2020 and 1.4% in Q4 2021. 

     This rate path was markedly higher than the August one, which 

showed Bank Rate peaking at 1.1% in 2021. 

     -Despite the higher Bank Rate path, the November IR still showed 

inflation holding above the 2.0% target level. The central forecast was 

for CPI to drift down from 2.46% in the fourth quarter of this year to 

2.10% in the fourth quarter of 2019 and on down to 2.03% in the fourth 

quarter of 2021. 

     That profile suggests the MPC could justify three 25 basis point 

rate hikes. The market rate curve in the IR is based on 15 day average 

market rates up to last Thursday - and after it was completed rate 

expectations fell back but the report is compatible with more 

tightening. 

     -Brexit remains the wildcard in policy setting. The Bank forecasts 

were once again conditioned on the stylized assumption that there will 

be a smooth Brexit moving to an average of end states. 

     The MPC stressed, however, that the direction of the policy 

response to either a hard or soft Brexit would not be automatic - as a 

hard Brexit, for example, could hit the supply side and boost inflation 

pressure if consumer demand held up. 

     "The monetary policy response to Brexit, whatever form it took, 

would not be automatic and could be in either direction," the MPC 

minutes said. 

     -The BOE issued an updated report from its agents on business 

conditions, which highlighted firms subdued investment intentions, with 

over 60% saying they expected investment to stay around the same in the 

next 12 months and similar numbers expecting to cut or raise it. 

     "Companies cited Brexit uncertainty as the biggest headwind to 

investment intentions," the report said. 

     -The MPC judged that there was no spare capacity left in the UK 

economy and that growth was set to run a touch faster than potential, 

with supply growth seen running at 1.5% a year. The Bank forecasts 

showed four quarter growth steady at 1.7% in Q4 2019, 2020 and 2021. 

     -The MPC stuck to its guidance that if things unfolded as forecast 

there would be "an ongoing tightening of monetary policy over the 

forecast period" with "any future increases in Bank Rate ... likely to 

be at a gradual pace and to a limited extent."     

     -The MPC's nine-to-zero vote for unchanged Bank Rate and unchanged  

asset purchases was as expected. 

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

[TOPICS:M$$BES,MT$$$$]