MNI PREVIEW: BOE Policy On Hold; All Eyes On Brexit Scenarios

By David Robinson

     LONDON (MNI) - The Bank of England Monetary Policy Committee is set to

leave policy unchanged at its meeting next week, but investors will focus on how

far its final Inflation Report before the Oct. 31 deadline for Brexit goes

towards illuminating its forecasts of the economic impact of a potential hard

Brexit.

     Following are key points likely to emerge from the report, minutes of the

end-July policy meeting and policy decision:

     --It would be a big surprise if the committee vote is anything other than

nine-to-zero for unchanged policy. Anything else so close to the Brexit deadline

would make little sense.

     "Brexit uncertainty is not, by itself, a reason for leaving interest rates

on hold . . . Nonetheless, with the economic road ahead potentially forking, the

case for holding rates until the road becomes clearer is strong," BOE Chief

Economist Andy Haldane said. Various of his colleagues have proffered similar

sentiments.

     --With the forecast round having closed last Thursday, Carney will

inevitably be pushed at the post Inflation Report press conference to say

something about the latest sterling sell-off and the mounting chance of no-deal.

     --If the MPC sticks to its convention of basing its central forecast on the

market rate curve and sticks to its model-based sterling forecast, it is likely

to project a significant overshoot of its 2.0% inflation target.

     In its May report, it forecast inflation rising above target from the end

of 2020 and staying above it. Since then rate expectations have fallen and

sterling has declined.

     --The MPC could adjust its sterling projections to strip out Brexit

effects, but unless it also changes its market rate assumptions, inconsistencies

would persist in its central forecast, which has been conditioned since the 2016

Brexit referendum on a smooth transition to an average of Brexit end states.

     Alternatives include highlighting the constant rate forecasts and/or

sketching out Brexit scenarios -- but to stop short of providing full

quarter-by-quarter economic projections.

     Scenarios could include a cliff-edge no deal and a smooth transition to no

deal.

     --The MPC collectively is unlikely to offer any clear guidance on how

policy will respond to a no-deal Brexit, as members' opinions have been divided.

Some, including Governor Mark Carney, have said easing is more likely than

tightening, while others have stressed that the policy response could go either

way.

     MPC member Jan Vlieghe said in a recent speech that in the event of a

no-deal Brexit "a scenario where the MPC holds or cuts the Bank Rate is more

likely than one where we increase Bank Rate in response to temporarily higher

inflation that would result from the weaker exchange rate .. but both directions

are possible."

     Others, including deputy governors Ben Broadbent and Dave Ramsden, have so

far declined to publicly endorse the line that easing is more likely.

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

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