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By David Robinson and Irene Prihoda
     LONDON (MNI) - The Bank of England signalled that more rate rises will be
needed than markets have been expecting as it forecast rising inflation over the
next few years, its Inflation Report and minutes of its May Monetary Policy
Committee meeting showed.
     While there were no dissenting votes or voices in the 9-0 vote to hold Bank
Rate steady at 0.75%, Inflation Report projections showed the rate of price
increases overshooting the 2.0% inflation target in two years' time and
continuing to rise, reaching 2.16% three years out if - as investors expect --
there is only one 25-basis-point rate hike over the next three years.
     Bank of England guidance was that the single hike the markets have priced
in would be inconsistent with the MPC's remit, Governor Mark Carney said at the
press conference, adding that a smooth Brexit transition would "require more,
and more frequent interest rate increases, than the market currently expects."
     The market rate curves are, however, based on different assumptions than
the MPC's collective projections, so any read across from one to the other is
tricky.
     Investors, unlike the MPC, attach some probability to a disorderly Brexit
whereas the Bank's projections are based on an average of outcomes that exclude
the cliff-edge no-deal scenario.
     Carney noted that no Brexit deal "is still there as the default option,"
and the fact the BOE excludes it is a forecasting convention rather than a
reflection of reality.
     The MPC could have signalled that markets were underpricing rate hikes
through one or two dissenting votes for higher rates or at least a block of text
in the minutes making the case for tightening.
     Instead, the collective message was that if Brexit proceeds smoothly then
markets will need to reprice. The Committee, meanwhile, can afford to
wait-and-see how things unfold.
     Domestic inflation indicators have been mixed and Brexit uncertainties
could continue to drag on business investment and consumption. "The cost of
waiting for further information was relatively low," the minutes said.
     The MPC's survey of businesses showed Brexit continuing to weigh on
investment and that firms' planning was largely unaltered by the deadline for
the UK's departure from the EU being pushed back from March to October.
     The BOE's near-term growth forecast was raised, to 0.5% on the quarter in
Q1 from 0.2% previously, but this reflected in part the boost due to
Brexit-related-stockpiling.
     Inflation was shown below target from Q3 2019 through Q4 2020, easing
     the pressure on the MPC to act immediately.
     The next key meeting for the MPC will be in August. The May minutes show
that a hike then cannot be ruled out, although it will hinge on whether
substantial progress is made in the Brexit process.
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MT$$$$,MX$$$$,M$$BE$]