MNI PREVIEW: BOE MPC Risks Market Disconnect At June Meeting

--BOE MPC To Leave Policy On Hold; Addressing Brexit Forecasts Can Wait For Aug

Inflation Report

By David Robinson

     LONDON (MNI) - The Bank of England is set to restate its guidance for

limited and gradual tightening at its June meeting, although some members are

likely to make the case against prolonged delay before hiking rates even as

Brexit and UK politics cast a cloud of uncertainty over the economy's outlook.

     The Monetary Policy Committee is expected to vote nine-to-zero vote for

unchanged policy, leaving Bank Rate at 0.75% and the stock of asset purchases at

stg445 billion.

     Minutes of the meeting will give MPC members a chance to publicly update

their near-term growth expectations after the latest activity data suggested a

near flat economy. May's minutes showed the committee expected 0.2% quarterly

growth.

     The prospect of Brexit, however, will overshadow the outlook, and has

already led to a disconnect between the positioning of more hawkish MPC members

and investors' expectations. MPC member Michael Saunders said June 10 that

further monetary tightening is likely to be needed to keep inflation in line

with the 2% target over the next two-to-three years, but interest rate

assumptions based on the Bank of England's SONIA rate imply that not a single 25

basis point hike is fully priced-in through 2020.

     While the BOE bases its forecasts on an average of alternative possible

"smooth Brexits", markets are pricing in the possibility that the UK could leave

the EU without a deal. The chances of this may rise depending on the outcome of

the race to succeed Theresa May as leader of the governing Conservative Party,

also being closely followed by investors.

     The BOE is set to re-examine its smooth Brexit assumptions in its August

quarterly forecast round, but so far it has steered away from the politically

fraught move of anticipating a particular outcome to the process of leaving the

EU.

     BOE Deputy Governor Ben Broadbent told the Treasury Select Committee June

10 session that, in his view, the MPC should avoid trying to directly impact

market rate expectations.

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

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