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MNI (London)
--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$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com