State Of Play: BOE Under Pressure To Reveal Brexit Scenarios

--Central Path Compatible With Gradual Tightening

By David Robinson

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

Inflation Report will almost inevitably be conditioned on the country moving

smoothly to an average of Brexit outcomes, but with the UK trying to finalize a

withdrawal agreement with the European Union the Bank is under pressure to shed

light on the likely impact of a no-deal scenario.

     The dilemma for the BOE Monetary Policy Committee, which meets Nov. 1 and

has to sign off on the Inflation Report projections, is that the smooth Brexit

scenario will provide only limited guidance to market participants. If, however,

the MPC were to bow to pressure and publish estimates of the impact of a no deal

or very soft Brexit scenarios, these would dominate media headlines and obscure

its central message that the policy rate is likely to head gradually higher.

     Governor Mark Carney and his colleagues could once again avoid putting

figures on various Brexit outcomes, but they would come under intense pressure

to publish estimates in the near future, with the cross-party Treasury Committee

demanding scenario analysis before parliament votes on a withdrawal agreement.

     --INVESTORS TAKE PROTECTION AGAINST EXTREME SCENARIOS

     As economists in the City and at the National Institute of Economic and

Social Research have stressed, the MPC is producing a single forecast when the

policy outlook is bifurcated and market participants have been taking out

options to try and cover extreme outcomes.

     The MPC's benign central forecast could well show a touch higher near-term

inflation, and stronger earnings growth, than it forecast in its previous

quarterly Inflation Report.

     The August Inflation Report showed headline average weekly earnings growth

of 2.5% in the fourth quarter of this year, rising to 3.25% by the final quarter

of 2019. Recent data suggest that these estimates could be on the low side and

BOE Chief Economist Andy Haldane talked this month about a "new dawn" for pay

growth, making a case for further tightening.

     "With growth in money wages running at close to 3 per cent, and with

productivity growth running closer to zero, domestic cost growth in the UK is

already running at, if not slightly above, rates consistent with the inflation

target," Haldane said.

     The BOE's estimate of the equilibrium, or non-inflationary (NAIRU), jobless

rate is 4.25%, with the MPC forecasting the jobless rate would dip below this

level by year end. The Bank is unlikely to lower its estimate further.

     "It is no longer clear risks to the NAIRU, and hence wages, are skewed to

the downside," Haldane said.

     --PAY GROWTH SEEN ACCELERATING

     The MPC is not united in the belief that pay growth will accelerate, with

Deputy Governor Jon Cunliffe highlighting how earnings have repeatedly

disappointed in the past. The Inflation Report forecasts, however, are a best

collective judgement and Cunliffe's view may be in the minority.

     In August, the MPC's central projection showed CPI inflation running above

the target 2.0% throughout the three-year forecast horizon, although it was only

very marginally higher by the end of the period.

     Recent price data could lead to marginal upward revisions to CPI in some

coming quarters, but if the increases are limited to, say, 10 basis points or so

a quarter they will have negligible impact on the policy outlook.

     The broad growth outline for GDP growth may be little changed from August,

once offsetting effects are added to the unexpected strength of third quarter

GDP.

     The question Carney and his colleagues will face at the press conference

and in his subsequent media interviews is whether they should aim to shape

market rate expectations for only a couple of hikes in the next three years or

to steer towards somewhat greater tightening.

     Whatever they choose to do will be clouded by the question of the impact of

varying Brexit scenarios - whether or not the MPC chooses to publish its

detailed analysis.

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

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