BoE: navigating between bimodal scenarios
- The BoE conditions its forecasts on government policy, which remains to leave the EU smoothly with a deal, whereas markets must price the risk of no-deal too. The growing gap in assumptions is stoking unrealistic excesses in the Bank’s forecasts.- MPC members are mindful of the misleading outlook and seem set to communicate around the issue. Most likely, in my view, is a variant of the assumption alteration in May-16 (pre-referendum), with alternative profiles indicatively provided.
- If the UK leaves the EU with a deal, the MPC probably intends to hike much sooner than market participants expect under that scenario. However, I forecast the UK to leave without a deal and see the MPC’s next move as a 50bp rate cut instead.
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