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Resumes Its Downtrend

By David Robinson
     LONDON (MNI) - The Bank of England Monetary Policy Committee will leave
policy on hold at its February meeting, but could provide fresh insight into
members' concerns over a global slowdown.
     The MPC's current guidance that tightening will be limited and gradual is
likely to be retained. But adding a line about the global slowdown combined with
softer Inflation Report growth and near-term inflation projections would
reinforce the market view that rate hikes could come only very slowly even in
the event of a smooth Brexit.
     Brexit will overshadow the Feb. 7 release of the policy decision and the
Bank's quarterly Inflation Report, with the March 29 deadline for a withdrawal
agreement or an extension of talks looming.
     The MPC is once again set to base its projections on the assumption of a
smooth transition to an average of Brexit end states. This assumes business and
consumers will have time to adjust, and excludes the possibility of a disorderly
no-deal scenario, despite Carney himself having said that the odds of this are
"uncomfortably high."
     The MPC's averaging approach to the UK's withdrawal from the EU was never
meant to endure - as sooner or later one end state or another will become much
more likely. But it is an approach that ensures consistency with its projections
since the 2016 referendum and avoids the politically fraught danger of being
seen to publicly calculate the probabilities of different Brexit outcomes.
     But while the MPC may shed no fresh light on its Brexit thinking its
overseas growth forecasts are due for a shake up.
     December minutes stated "the near-term outlook for global growth has
softened and downside risks to growth have increased", and that the decline in
oil prices meant "UK CPI inflation is likely to fall below 2% in coming months."
     Recent data suggest the BOE will lower growth and near-term inflation
projections. In the November Inflation Report the MPC projected fourth quarter
euro area growth of 0.4% while subsequent official data came in at just 0.2%.
     Central projections in the November Inflation Report showed CPI averaging
2.18% in the first quarter of this year and 2.32% in the second, so a shift
below 2.0% would be a marked decrease.
     At the two- and three-year forecast horizons, however, the MPC may make
only minor adjustments to projections of CPI at 2.12% in the fourth quarter of
2020 and 2.03% in the fourth quarter of 2021.
     The more distant projections will reflect the enduring effects of an
absence of spare capacity and the assumption that yearly trend growth is only
around 1.5%. The fall in trade-weighted sterling since the November report will
probably add around 0.2 percentage point to headline CPI.
     The Inflation Report will also contain the MPC's annual stock take on
labour supply and spare capacity. The February 2018 exercise concluded
equilibrium joblessness had fallen to 4.25% and that slack in the economy was
     This time around the MPC could well leave the 4.25% estimate unchanged
while stating that the output gap has turned positive, with the jobless rate
down at 4.0% and the BOE estimating potential yearly growth at just 1.5%.
--MNI London Bureau; tel: +44 203-586-2223; email:
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