MNI PREVIEW: BOE Seen Unchanged; UK Vote Mainly Factored In

--BOE November Forecasts Assumed Unaligned Brexit Deal; No Emergency Budget

By David Robinson

     LONDON (MNI) - The Bank of England is set to leave monetary policy

unchanged in December, with the Conservative victory in the General Election

ensuring that government policy appears to be bang-in-line with the assumptions

made in the Monetary Policy Committee's November quarterly forecast round.

     The BOE current policy has interest rates at 0.75%, with the stock of

combined asset purchases sitting at stg445 billion.

     The following are key points ahead of next week's meeting, with the

announcement due on Thursday, November 19:

     -The MPC made the decision in November to switch from basing its

projections on an average of Brexit outturns to assuming that the UK would end

up outside of both the customs union and single market under a new trading

relationship with the EU. In this new relationship, growth is crimped as customs

checks come into force and regulatory trade barriers increase.

     -Following the Conservative's overwhelming victory in Thursday's General

Election, Prime Minister Boris Johnson looks set to push ahead with his plans to

achieve precisely the outcome factored in by the MPC. The MPC will stick to its

new assumptions and it is too early to make any hefty changes to its growth

outlook, for soft four-quarter growth of 1.6% in Q4 2020 and 1.8% in Q4 2021.  

     -Prior to the electoral outcome, there was speculation about emergency

fiscal measures but the briefing overnight is that the next Budget will not now

be until March. The MPC had already factored in the government's pre-election

announcement of increased spending. In the September Spending Round, Treasury

head Sajid Javid announced Stg13 billion of extra spending in 2020-21 and stg2

billion extra this year. The MPC said would raise GDP by around 0.4% over

three-years, a modest increase which does little to alter the bigger picture.

     -The reaction of financial markets to the overnight political news -- a

blend of a scaling back of US trade sanctions on China and the Conservative

victory -- saw sterling and sterling assets rise. The MPC can wait to see if

these asset price changes persist, as it factors in a 15-working day average

into its next forecast round.

     MPC members have stressed that all Brexit scenarios have at least partially

offsetting effects and that there is no simple read-across to policy. Stronger

sterling, pushing down on import prices, may help soften the case for a hike but

a diminution of uncertainty may strengthen it.

     -One question at the December meeting is whether the two MPC members who

backed a 25 basis point rate cut at the November meeting, Jonathan Haskel and

Michael Saunders, will re-join the no change majority.

     Saunders said in September that "the current persistent rolling uncertainty

is likely to be especially damaging" with firms continuing to expect Brexit to

be resolved only to be disappointed. If uncertainty does diminish markedly, this

effect should ease and may chip away at his and Haskel's case for easing,

especially if the global backdrop improves, but whether they will change their

views as early as next week is open to doubt.

     There seems little chance of the other seven members of the MPC joining the

change camp. 

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

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