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Bailey to speak later on R*

  • Bank of England Governor Andrew Bailey is due to give a speech this evening at 18:00BST which is entitled “The policy landscape: structural change, global R * and the missing-investment puzzle”. There will be intense focus on whether Bailey answers the question of where he estimates R* to be for the UK, and whether he thinks that the MPC will need to raise rates above this level in order to keep inflation under control.
  • Outgoing external MPC member Saunders (whose last MPC meeting will be in August) has said that market estimates of R* between 1.25-2.50% seem reasonable.
  • Chief Economist Huw Pill has previously played down the importance of R*, noting that it is highly uncertain where the level is, and it was more useful as a concept when it was clear Bank Rate was clearly below R*.
  • Catherine Mann was asked at the MNI Connect event by former MPC member Jan Vlieghe why the MPC has not communicated its thoughts on R* and whether Bank Rate will need to exceed this or not. She said that there were a lot of difficulties in putting a number on R* and refused to be drawn on a level.
  • Note that in the BoE’s Survey of Market Participants conducted ahead of the June MPC meeting, in response to a question asking for estimates of the neutral rate for UK Bank Rate the median response was 2.00%.
  • Based on current market pricing, we will see Bank Rate of 2.00% by September, with a terminal between 2.75-3.00% reached in H1-23.

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