BOE Hikes Bank Rate 25bp; Sees R-Star In 0% to 1% Range>

--BOE: BOE MPC Voted 9-0 For 25 bps Bank Rate Hike 

     By David Robinson, Jamie Satchi 

     LONDON (MNI) - The Bank of England Monetary Policy Committee (MPC) 

voted unanimously for a 25 basis point hike, lifting Bank Rate to 0.75%. 

     The MPC pointed to further rate hikes down the line. It said that 

if the economy evolved as expected "an ongoing tightening of monetary 

policy ... would be appropriate" and published an estimate for the 

equilibrium interest rate of 2% to 3% in nominal terms. 

     A hike had been widely expected, but this hike was more hawkish 

than consensus. Most analysts had expected one or more dissenting votes 

in favour of unchanged policy, with Deputy Governor Jon Cunliffe at the 

very least expected to keep Bank Rate on hold. 

     For the first time the MPC published its estimate of R*, the trend 

real interest rate. It highlighted the complexities of assessing where 

R* lies and said that the short term equilibrium rate, r*, fluctuates. 

     Nevertheless, the MPC's estimate of the R* range, at 0-1%, that is 

2-3% in nominal terms, is markedly above the current market implied 

expectations for Bank Rate. Market pricing showed Bank Rate only rising 

to around 1.25% five years down the line. 

     The Bank's modal estimate for R* was 0.25%. 

     The growth and inflation projections in the Bank's August Inflation 

Report were little changed from those in May. 

     Based on market expectations for Bank Rate to rise to 0.9% in Q3 

2019 and 1.0% in Q3 2020 and on up to 1.1% in 2021 headline inflation 

(CPI) was shown above target throughout the three year forecast horizon. 

     CPI was projected to be at 2.15% in one year's time, 2.09% in two 

years' time and 2.03% in 2021. 

     These forecasts were on average some 0.1 percentage point above 

their May predecessors. This was largely due to the depreciation in 

sterling between the May and August forecast rounds and the decline in 

market interest rate expectations. 

     GDP growth in calendar year 2018 was forecast to be 1.4%, unchanged 

from the May projection, and the 2019 GDP forecast was raised by 0.1 

percentage point to 1.8% with 2020 shown at 1.7%. 

     The MPC believes that there is next to no spare capacity left in 

the UK economy and that domestic inflation pressures will increase.

     Spare capacity was shown at a rounded 0% of GDP. 

     Excess demand, or a positive output gap, is expected to emerge in 

late 2019 and to increase thereafter. The output gap was projected at 

0.25% in Q3 2020, rising to 0.5% in Q3 2021.

     A key component of spare capacity is the jobless rate. This was 

shown falling to 3.9% in 2018 and holding at that level in 2019 and 

2020, below the MPC's estimate of the equilibrium rate at 4.25%. 

--London newsroom: e-mail: david.robinson@marketnews.com 

[TOPICS: M$B$$$,M$$BE$,MABPR$,MT$$$$]