Bank of England to lean against bets on lower market rates ahead of Brexit

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LONDON (Reuters) – The Bank of England is expected to fend off investors on Thursday betting it will follow other central banks and cut rates in coming months, even as the risk of a disorderly Brexit dims growth prospects. .

FILE PHOTO: A man walks past the Bank of England in the City of London, Britain February 7, 2019. REUTERS/Hannah McKay//File Photo

Economists polled by Reuters are almost certain that the BoE’s monetary policy committee will vote 9-0 to keep rates unchanged at 0.75%.

But it is less clear how Governor Mark Carney will rise to the challenge posed by a possible no-deal Brexit.

New Prime Minister Boris Johnson has said he will pull Britain out of the European Union on October 31 without a transition deal if Brussels does not rewrite the deal he struck with his predecessor Theresa May.

The risk of a disruptive no-deal Brexit that could push Britain into recession means interest rate futures now price nearly a 90% chance of a 25bp rate cut before that Carney does not resign at the end of January BOWATCH.

The US Federal Reserve cut its main interest rate by a quarter of a percentage point on Wednesday, and the European Central Bank is expected to take similar action next month as the two battle a slowdown caused by the US trade dispute. -Chinese.

But the BoE says Britain is a special case.

Chief economist Andy Haldane pointed out last week that UK rates had not risen as much as in the US, while the UK labor market and inflation were much more buoyant than in the euro zone.

“We expect the BoE … to say rates need to rise if there’s a Brexit deal,” said Bank of America Merrill Lynch economist Robert Wood.

Guidance on what the BoE will do if there is no deal will be less clear and may turn out to be little more than “wait and see”, Wood added.

The BoE said a rate cut is far from automatic in the event of a disorderly Brexit, as a further drop in the pound – already near a three-year low against major currencies GBPTWI=BOEL — would be likely to cause a persistent inflationary shock.

However, Carney and some other rate regulators have said a rate cut would be their most likely response.

WINDING FORECAST

Normally, the BoE’s forecast for inflation and growth would offer good guidance on the direction of rates and the outlook for the economy, but that’s less likely on Thursday.

In May, the BoE forecast growth of 1.5% this year and inflation slightly above its target of 2% over the next two to three years.

He also said markets underestimated his willingness to raise rates if the economy grew as expected.

However, with so much uncertainty over Brexit, forecasts are likely to be based on conflicting assumptions.

The central bank usually bases its forecasts on official government policy – which remains to get a Brexit deal – although a no-deal Brexit is a growing risk.

Yet market prices for sterling and interest rates, as well as business confidence surveys, which all feed into the BoE’s forecast, reflect the risk of a no-deal Brexit.

Many economists would prefer the BoE to issue different forecasts for the economy under the “deal” and “no deal” scenarios.

But it is more likely that the central bank, which has in the past been accused by pro-Brexit campaigners of having an anti-Brexit bias, will instead change the financial market assumptions that go into its forecast.

This would be similar to his approach just before the EU referendum in 2016.

“This would allow the BoE to take into account the increased risks of no-deal without being specific about them and therefore expose itself to political criticism,” Wood said.

Reporting by David Milliken; Editing by Catherine Evans

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