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(H1) Fragile Outlook

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Curve Lower, Flatter as Yields Reverse Off Cycle Highs

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Probes Key Support

MNI (London)
By David Robinson
     LONDON (MNI) - The National Institute of Economic and Social Research
(NIESR) published its quarterly forecasts for the UK and world economies
Wednesday ahead of the Bank of England Monetary Policy Committee's (MPC's)
quarterly projections which are out Thursday.
     NIESR's work highlighted the tricky challenges facing it, and the BOE, in
producing forecasts for the UK economy at present:
     -NIESR anticipates that the MPC will hike Bank Rate by 25 basis points to
0.75% on the Thursday, with the policy rate then rising on up to 1.25% in 2019.
The outlook is cloudy with NIESR head Jagjit Chadha saying that the MPC should
take the opportunity to stress the uncertainty of its policy stance. Chadha said
that the MPC should stress that it is ready to reverse the hike, if necessary.
     -Brexit remains a key source of complexity in UK economic projections. The
detailed assumptions a forecaster makes for the Brexit outturn have a hefty
impact. The BOE conditions its projections on a smooth transition to an average
of end Brexit states whereas NIESR assumes a soft Brexit. NIESR also, however,
in these quarterly forecasts produced a projection based on the UK's latest
proposals, contained in the government's White Paper, which aims to keep the
country in the single market for goods but leaves services out in the cold.
     NIESR said that this scenario would result in output growth stalling, due
to the hit on services output, but that this would be moderated by sterling
depreciation, adding 1.4 percentage points to headline inflation in 2021, taking
CPI over 3% instead of leaving it around the BOE's 2.0% target.
     -The UK fiscal projections, based on tight spending controls, looks
unsustainable. NIESR said that the pressure to end fiscal consolidation was high
and the recent announcement of increased pay awards for many public sector
workers reflected this. The pay gap between public and private sector workers
gap was estimated at 3% and NIESR said that further pay rises would be needed to
eliminate it, and these might be required to fill skill shortages. As a result
the government's aim of pushing spending (total managed expenditure) below its
long run average looks "unsustainable," NIESR said.
     -Away from the UK things look at markedly rosier. NIESR's forecast for UK
growth in 2018 was 1.4% and 1.7% for 2019 compared with global GDP growth of
3.9% this year and 3.8% next year.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: MABDS$,MAUDR$,MAUDS$,MMUFE$,M$B$$$,M$E$$$,M$U$$$,M$$BE$,MGB$$$,MGU$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com