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BoE Defends Forecasts as Agents Query Rosy Assumptions

Top Bank of England (BoE) officials Friday reiterated the downside risks to forecasts of a smart economic rebound under questioning from the central bank’s regional representatives about the its baseline forecasting assumptions.

The central forecast released Thursday “is sensible”, albeit with “very substantial” downside risk, said Governor Andrew Bailey, addressing the Bank’s regional agents via a webcast, along with fellow Monetary Policy Committee members Dave Ramsden and Ben Broadbent.

The Bank expects output to rebound by 18% in the third quarter following a 21% plunge between April and June. Official GDP data are scheduled for release August 12.

The discussion’s moderator revealed the submission of numerous questions about the Bank’s economic models, not least the forecast of a trade deal with the European Union when the current transitional arrangement expires at year end.

The MPC is “not considering” the risk of a no-deal Brexit, as forecasts are based upon “government policy” of concluding a trade deal with the EU, according to Broadbent. However, officials in both the UK and the EU admit that trade talks have stalled amid disagreements on state support for business and the allocation of fishing quotas in UK territorial waters.

Governor Bailey also appeared to dampen speculation of a near-term cut in the Bank’s base rate, currently standing at a record-low 0.1%. The MPC “is not considering” sub-zero interest rates, but “it’s appropriate” that negative rates are in the committee’s “tool box”, he said. The BoE has no objection to the “principle” of negative rates and the MPC is still assessing whether such policy would be “effective” in the UK, added Broadbent.

BoE officials suggested that future policy moves are dependent on the unemployment rate, with a government furlough scheme due to expire at the end of October. The MPC expects unemployment to hit 7.5% by year end, but it’s “more likely” that joblessness will exceed that rate than fall short, said Ramsden.

Unemployment stood just above a four-decade low of 3.9% in the three months to May. Second quarter jobless data are scheduled for release on August 11th.

Laurie Laird

Julie Ros

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