MNI STATE OF PLAY: BOE MPC December Meet Seen A Space Filler

--Brexit Negotiation Outcome As In Bank Forecasts

By David Robinson

     LONDON (MNI) - The breakthrough in the United Kingdom's negotiations over

leaving the European Union is likely to underpin the Bank of England Monetary

Policy Committee assumption that businesses and consumers will continue to act

on the belief that there will be a smooth Brexit.

     The MPC's December meeting, culminating in a policy announcement at 1200GMT

Thursday, is set to be a low key affair with policy, almost inevitably, left on

hold and the committee offering no commentary designed to shake market interest

rate perceptions.

     The denouement of the political drama over moving to stage two of Brexit

talks will not be new news for the Bank's forecasts, which are conditioned on an

orderly Brexit, that is one in which the UK transitions to a new trade deal with

the European Union rather than crashing out without no deal. 

     The events of last week make the Bank's working assumptions look pretty

robust.

     In a BBC interview Sunday David Davis, Secretary of State for Exiting the

EU, summed up the significance Friday's deal, saying it meant that "the odds ..

against a WTO(World Trade Organisation) or no deal outcome have dropped

dramatically."

     The Bank has been excluding both no deal and no Brexit from its probability

forecasts, and focussing instead on how business and consumers perceive the

likely outcome of Brexit and how they act on those perceptions.

     So at the December meeting the MPC will be able to focus its attention on

the evolution of the economy without having to rework its Brexit assumptions.

     --LITTLE DECEMBER GUIDANCE 

     Since the MPC hiked Bank Rate to 0.5% from 0.25% in November and dropped

its line that markets may be underestimating the amount of tightening required,

no MPC member has said anything to fuel speculation that further near-term

tightening is likely.

     The December minutes, to be published alongside the policy decision, are

likely to offer little, if anything, of substance on the timing of the next

hike. 

     Since the November decision, notable speeches from MPC members have come

from deputy governors Ben Broadbent, who set out why there is no straightforward

read across from Brexit developments to tighter or looser policy, and Dave

Ramsden, who explained his decision to vote against the November rate hike. 

     The November forecasts showed inflation on market interest rate

assumptions, which were for Bank Rate to rise to 1.0% over three years, falling

very gently to stand at 2.1% at the end of the three year forecast horizon.

     The MPC dropped its line that markets may be underestimating the amount of

tightening that would be required. It would be a surprise for market

participants if that line was resurrected this month ahead of the February

quarterly forecast round.

     --ECONOMY AS EXPECTED

     The economy has evolved broadly as the committee predicted, with inflation

running a shade weaker and growth a touch stronger than the MPC had assumed. 

     Sterling has strengthened since the MPC completed its November forecast

round, but the increase is pretty marginal.

     The MPC has been setting policy on the assumption that circumstances are

exceptional, so it can justify not aiming to return inflation to the 2.0% target

in its usual 18-24 month period but instead accept a trade-off and allow the

overshoot to extend out to three years in order to support employment and the

economy.

     One question for the MPC going forward is whether it can continue to argue,

with unemployment at historic lows and growth around what the BOE assumes is its

new trend of 0.4% a quarter, whether these are exceptional times.

     The question of when to tighten next is likely to be addressed with more

urgency come February. In December the consensus among analysts is that it will

be a nine to zero vote in favour of unchanged policy.

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

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