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Still Looking For Weakness

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
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]