MNI POLICY: MPC Leaves Policy Steady; See Softness Temporary>

--Votes 9-0 For Unchanged Policy And Asset Purchases

     By David Robinson

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

unanimously to leave policy unchanged at its February meeeting, while 

the Inflation Report showed near term growth and inflation softer than 

previously expected, but further ahead growth was expected to recover 

and inflation to come in a touch higher.

    The following are key points from the report:

    -The Inflation Report forecast round gave Bank economists time to 

look in depth at the weakness in recent UK and global growth and the  

MPC took the view that it was likely to be ephemeral. "A period of 

softer growth domestically and in the rest of the world  was likely to 

prove only temporary and, in the UK, excess demand was expected to 

build over the second half of the forecast period," it said.

    -The MPC did not attach the line about temporary weaker global 

growth to its policy guidance. Instead it stuck to the mantra that "an 

ongoing tightening of monetary policy over the forecast period, at a 

gradual pace and to a limited extent, would be appropriate to return 

inflation sustainably to the 2% target."

    -Brexit uncertainty overshadows this Inflation Report. The MPC stuck 

to its convention of assuming a smooth transition to one of a range of 

Brexit outcomes, whereas market pricing has to place some weight on a 

disruptive Brexit outturn. The BOE's stylised Brexit assumptions suggest 

that Bank Rate may have to rise a little faster than the market had 

been assuming.

    -Inflation on the CPI measure was shown at 2.35% in Q1 2020 and 

2.07% in Q1 2021 and 2.11% in Q1 2022. These projections were based on 

Bank Rate rising from its current 0.75% to 0.9% at the end of this year, 

1.0% at end 2020 and 1.1% at end 2021.

   -Bank economists forecast Q4 2018 growth would be 0.3% and Q1 2019 

growth just 0.2%, with Q2 growth similar to Q1. These weak near term 

growth rates are all below potential. While the output gap was reckoned 

to be zero at present supply was expected to exceed demand near term, 

with a negative output gap of -0.25% in Q1 2020.

   Further out, however, bolstered by less restrictive monetary policy 

than previously assumed around the world and the removal of Brexit 

uncertainty, growth is expected to firm with a positive output gap of 

0.75% in Q1 2022.

   -The MPC said there was evidence from its own agents work and other 

surveys that Brexit uncertainty was hitting economic activity harder 

than previously thought. Business investment has been contracting, with 

corporate activity delayed awaiting the denouement of the Brexit 

negotiations. The agents survey found that around half of companies felt 

they were not ready for a 'no deal, no transition' Brexit.

   -Alongside Brexit questions the agents conducted a business pay 

survey, which found average pay was expected to nudge up to 2.9% in 2019 

from 2.8% in 2018. 

     London Bureau; e-mail: david.robinson@marketnews.com 

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