MNI POLICY: NIESR Sees Aug BOE Hike In Smooth Brexit

--NIESR Sees UK Skirting Recession On Hard Brexit

--UK Set To Break Fiscal Goal Of Sub-2% GDP Borrowing 2022

By David Robinson

     LONDON (MNI) - The Bank of England could hike rates as soon as August in

the event of a smooth Brexit, but the UK could come close to recession if it

leaves the EU in a disorderly fashion, the National Institute of Economic and

Social Research said in updated quarterly forecasts Wednesday.

     Following are key points from the forecasts:

     --If there is a smooth Brexit, with the UK agreeing a transition period in

which it operates under EU law until end 2020, the NIESR forecast the Bank of

England would deliver on guidance for limited and gradual tightening.

     It forecast a first 25-basis-point hike in August, lifting Bank Rate to

1.0%, with one 25-bps hike every six months thereafter, reaching 2.0% in 2022.

     The NIESR had previously forecast the first hike would come in February,

but with Brexit uncertainty at its zenith a string of analysts who had predicted

a hike in the first half of this year have pulled their calls.

     --The BOE's Monetary Policy Committee will not publish a forecast for a

no-deal Brexit in its Inflation Report Thursday but the NIESR took a stab at it.

     The NIESR looked at alternative no-deal scenarios. In one the MPC chooses

to look through elevated inflation resulting from sterling devaluation and

fiscal policy is supportive, and in another the MPC tightens due to the

inflation overshoot.

     The differences were marked. If monetary and fiscal policy is not

accommodative the UK economy was shown near flat through to mid-2020 with the

NIESR's Amit Kara saying that a technical recession, two quarters of negative

growth, was within the uncertainty band.

     With accommodative policy, growth after a no-deal Brexit was seen exceeding

the 1.5%-plus-a-year levels seen under a smooth Brexit.

     How the MPC will respond to a no deal is a moot point, as members have

stuck to the line that policy could move "in either direction" depending on the

magnitude of hits to supply, demand and the exchange rate.

     The NIESR's analysis shows market pricing is compatible with an injection

of fresh monetary stimulus in the event of no deal.

     --The NIESR stated that Chancellor of the Exchequer Philip Hammond is set

to miss his self-imposed goal of getting the cyclically-adjusted budget deficit

below 2% of GDP by the end of this parliament, scheduled for 2022, even in the

event of a smooth Brexit.

     He has pledged a substantial rise in health spending and, with economic

growth soft and political tension high, there seems little chance of tightening

fiscal policy to pay for spending increases.

     --The MPC on Thursday will also reveal how seriously it takes the

likelihood of a deep and protracted downturn in global growth.

     The NIESR's view is that while growth is slowing, the speed of the

deceleration is likely to be far from dramatic.

     It forecast world growth slowing from 3.8% in 2018 to 3.5% in 2020 and euro

area growth easing from 1.9% to 1.5% over the same period. The BOE may well take

a similar view to the NIESR.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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