MNI PREVIEW: BOE Differences Likely Over Brexit Assumptions

--BOE Central Assumption That Brexit Uncertainty Diminishes, Demand Recovers

Open To Challenge

--Central forecasts Likely To Be Little Changed From August; Backing Very Gentle

Tightening

By David Robinson

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

surely leave policy on hold at its November meeting but MPC members may be split

over whether Brexit uncertainty will fade and that limited tightening is likely

to be justified down the line.

     The MPC's policy judgement and rebranded Monetary Policy Report (MPR),

containing its analysis and quarterly economic forecasts, are set to be

published at 12:00 GMT Thursday. Dissents look far more likely to come from the

dovish rather than the hawkish side.

     The following are key things to watch out for:

     --Independent members Michael Saunders and Gertjan Vlieghe are seen as most

likely to dissent, and call for a cut, with Saunders arguing in a Sept. 27

speech that the cost of having to reverse policy if a cut turned out to be

premature would probably be small.

     Vlieghe in an Oct. 15 speech said activity indicators suggest that

underlying UK growth is "close to zero" and that economic slack "is probably

increasing again, which has a significant impact on the monetary policy

outlook."

     --A "key judgement" in the August Inflation Report (which will be rebranded

as the MPR) was that there would be a smooth Brexit with UK demand growth

recovering after a near-term soft patch as uncertainties over trade with the EU

subside over the second and third years of the forecast.

     Saunders, however, explicitly challenged this assumption in his September

speech saying that "Another scenario, and this is perhaps more likely to me, is

of prolonged high Brexit uncertainty - even without a no-deal Brexit actually

occurring."

     Saunders' view appears to be borne out by recent political events. A

General Election has been set for December 12 and Conservative officials have

been pushing the view that there will be no further Brexit extension after the

current planned transition period finishes at the end of 2020 - leaving

uncertainty high as businesses have to factor in the risk of the UK leaving the

EU with no trade deal in a year's time.

     --The MPC in August stuck to the same Brexit forecasting convention that it

deployed since August 2016, that there would be "a smooth transition to the

average of a range of possible outcomes for the United Kingdom's eventual

trading relationship with the European Union."

     This range of outcomes includes the option of close alignment with the EU

but the government's stated policy excludes this, as it rules out the

possibility of the UK being in the EU Customs Union or Single Market.

     The MPC could choose to narrow its range of outcomes but with parliament

about to dissolve and election uncertainty to add to the mix, the committee may

play it safe and try and avoid getting drawn into the political morass by

sticking to its previous convention.

     --The central forecasts are unlikely to be changed greatly in comparison to

the August Inflation Report.

     GDP was shown running soft next year, with fourth quarter growth running

soft at 1.3% in 2019 and 2020 before picking up to 2.3% in 2021. Headline CPI

inflation was seen just above the 2.0% target, at 2.1% in 2020 and 2.2% in 2021,

justifying very gentle tightening.

     While Saunders and others may dissent from the central view, the likelihood

is that the MPC collectively will not feel that the data and news flow have been

significantly different to depart significantly from this outlook.

     This would allow the MPC to restate its policy guidance that "assuming some

recovery in global growth, a significant margin of excess demand was likely to

build in the medium term .. (and) increases in interest rates, at a gradual pace

and to a limited extent, would be appropriate to return inflation sustainably to

the 2% target."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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