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--BOE Central Assumption That Brexit Uncertainty Diminishes, Demand Recovers
Open To Challenge
--Central forecasts Likely To Be Little Changed From August; Backing Very Gentle
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
     --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
     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:
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]