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Mid-2023 Downside Insurance

     LONDON (MNI) - It is more likely that the Bank of England holds or cuts
Bank Rate in the event of a 'no deal' Brexit, even if a weaker pound and tariffs
on imports temporarily push inflation higher, Bank of England Monetary Policy
Committee member Gertjan Vlieghe said Friday.
     But the response to 'no deal' would not be automatic, and would depend on
the balance of the impact on demand, supply and the exchange rate, Vlieghe said.
     Here are other key points from his speech:
     --"On balance I think it is more likely that I would move to cut Bank Rate
towards the effective lower bound of close to 0% in the event of a no-deal
scenario."
     --A smooth Brexit will likely see business investment growth improve, which
would push overall growth up above potential again, from its current
below-potential pace, Vlieghe said, referring to analysis based on an average of
possible scenarios for a negotiated exit from the EU.
     --Such an outcome would be likely to result in upward wage pressure, and
therefore upward pressure on underlying inflation. This would justify further
limited and gradual rate increases, potentially allowing Bank Rate to reach
1.00% in a year's time, 1.25% in two years' time, and 1.75% in three years'
time, with large uncertainty bands around this central path. Much would depend
on how the global economy evolves.
     --If the global economy weakens further and global uncertainty remains
high, the resulting headwind could offset the tailwind from a smooth Brexit.
     --"'Smooth Brexit' and 'no deal' scenarios are not the only two scenarios.
One can imagine a scenario where a deal is not agreed later this year, but a no
deal scenario is avoided temporarily. That would likely involve ongoing
headwinds to the economy from uncertainty, while avoiding the disruptive
supply-side impact of no deal."
     --Wage growth seems to have eased a little, down to a pace closer to 3%,
Vlieghe said. He noted that the Bank's Agents also report that upward pay
pressure, which had been rising for the past two years or so, has stabilised.
Services inflation looks like it might be moving higher at last, he said, but
only very slowly and from a low rate.
--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$]