MNI STATE OF PLAY: Hawkish BOE Outlook But Brexit A Wildcard

--November Inflation Report Hawkish

--Carney Leaves Door Open To Hike If No Deal Brexit

By David Robinson

     LONDON (MNI) - Central projections in the Bank of England's November

Inflation Report painted a picture of steady growth, inflation running just

above target and a gently rising Bank Rate, but Brexit is making policy much

less predictable.

     After leaving Bank Rate unchanged at 0.75% at its meeting, the Monetary

Policy Committee stressed the policy response to the various Brexit outcomes

would not be automatic and Governor Mark Carney said tightening could be

justified even in the event of no deal.

     The Inflation Report's central projections were once again based on an

average of smooth Brexit outturns. These exclude a no deal scenario under which

the UK departs the EU in March 2019 with no transitional arrangements.

     While the MPC did not publish alternative Brexit scenarios, despite a

request for them from parliament's Treasury Select Committee, Carney in the

press conference went some way towards filling the information void, warning

that even in the case of a no deal Bank Rate may have to rise.

     "There are scenarios where policy would need to be tightened in the event

of a no-deal, no transition, so-called 'disorderly' Brexit," Carney said.

     --DISRUPTIVE BREXIT

     A disruptive Brexit "would probably result in a further decline in the

exchange rate and a large, immediate reduction in supply," he said.

     Carney also noted that conditions had changed since the MPC pumped in

stimulus in response to the vote to leave in 2016's EU referendum. The output

gap has closed, whereas then it was negative, and inflation is above target and

likely to stay there.

     Market pricing, based on the costs of insuring against large sterling

depreciations relative to a large appreciation, indicate that the weight market

participants have placed on a substantial fall in the value of the currency has

increased.

     The November Inflation Report's central projections, however, assumed

sterling would move sideways as the Brexit process unfolds smoothly - giving

them a sense of unreality. They were also more hawkish than those provided in

August.

     The growth and inflation forecasts were conditioned on almost three

25-basis-point hikes over the next three years rather than a shade over two in

the August report. On this basis the report still showed inflation above the

2.0% target throughout the forecast period.

     That suggests at face value that three, or even more, hikes could be

justified if things unfold as expected.

     The government's Oct. 29 Budget came too late to be factored in to the

report. Carney, however, said that it was stimulative - with its tax giveaway

and higher public spending. This will add to the upward pressure on rates.

     With Brexit negotiations over the withdrawal agreement coming to a head,

however, it makes it hard for money markets to place great weight on the Bank's

central forecasts.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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