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By David Robinson
LONDON (MNI) - The UK government would fail to meet a key fiscal goal in
the event of a hard, or no deal, Brexit and the Bank of England Monetary Policy
Committee (MPC) may have to leave policy on hold rather than responding by
easing, the National Institute of Economic and Social Research said.
The NIESR published its quarterly forecasts on Friday, with additional work
on the UK Budget which is revealed on Monday and on Brexit scenarios. Following
are key points raised:
--The NIESR distinguished between a no deal, but orderly, Brexit and a
disorderly one. Amit Kara, head of UK macroeconomic forecasting, likened the
former to an amicable divorce, with both parties taking steps to minimize
damage, whereas the outcome of the latter, with a breakdown in relations, would
be near un-forecastable.
--The government aims to get its structural deficit below 2% of GDP in the
2020-21 fiscal year. The NIESR reckons it has scope to raise expenditure and
deliver on its pledge of increasing real health spending and still meet this
goal in the event of a soft Brexit.
NIESR forecasts public sector net borrowing (PSNBX) as a share of GDP will
rise from 1.7% of GDP in 2019-20 to 1.9% in 2020-21 with a soft Brexit. In the
event of a no deal scenario, however, PSNBX would rise to 2.2% of GDP in 2019
and 2.7% in 2020.
--The NIESR cast doubt on the widespread assumption that the MPC would
respond to a no deal Brexit, one where the UK leaves in March 2019 with no
transition period or trade deal with the European Union, by easing policy.
The MPC responded to the June 2016 Brexit referendum by cutting Bank Rate
and re-launching assets purchases but the NIESR pointed out that the economy is
in a markedly different starting place.
"The case for stimulus is less clear now because the economy has less spare
capacity and CPI inflation is above the target level," the NIESR stated in its
--Supply capacity could be hit by a no-deal Brexit, which could put
sustained upward pressure on inflation, although the NIESR highlighted the
uncertainty around near-term supply side forecasts.
"If ... supply capacity is damaged because investment falls and at the same
time household consumption and exports remain unaffected, the MPC may be forced
to hold policy unchanged," the NIESR said.
The NIESR's central forecast, conditioned on a soft Brexit, is for the
policy rate, Bank Rate, to rise from its current 0.75% to 1.1% in 2019 and 1.6%
in 2020, with 25-basis-point rate hikes coming every six months or so.
--Assuming a soft Brexit, the NIESR sees UK growth continuing to run a
little above, or at, its potential rate of around 0.4% quarter-on-quarter. Its
estimate for 2019 growth was 1.9%, for 2020 1.6% and 1.7% in 2021.
--The BOE's MPC in its quarterly Inflation Report forecasts out Thursday,
which will be conditioned on an average of smooth Brexit outcomes, is likely to
show similarly steady growth. The NIESR's main economic model has many
similarities to the BOE one and its senior staff are Bank veterans.
The MPC, however, has not so far, unlike the NIESR, published alternative
scenarios based on different Brexit outcomes, although it is under pressure from
lawmakers to do so.
--MNI London Bureau; tel: +44 203-586-2223; email: firstname.lastname@example.org