MNI ANALYSIS: BOE Opens Up On Neutral Rate; No To Policy Path

-BOE MPC To Publish New Analysis On Neutral Interest Rate In Aug IR

-MPC Debated Publishing Its Own Bank Rate Path, Majority Against

By David Robinson

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

to take one step along the road to greater transparency by giving its estimate

of where the neutral interest rate lies, but the majority on the committee still

oppose going the extra mile and publishing their own future policy rate path.

     The MPC publishes neither a collective policy rate forecast nor individual

members' ones and on Tuesday BOE Governor Mark Carney revealed that the majority

on the committee remain opposed to doing so. He revealed, however, that the

August Inflation Report will have an assessment of where the neutral policy

rate, the rate that neither stimulates nor slows growth, may be.

     The MPC has been a bulwark against the modernizing trend for policymakers

to publish their own projections, collectively or individually, of where the

policy rate is likely to head. 

     --MPC REMAINS UNPUBLISHED

     On Tuesday, external MPC member Gertjan Vlieghe revealed to the Treasury

Select Committee that he had made the case within the Bank for publishing a rate

forecast but he seems to be pushing against a closed door.

     Vlieghe's colleagues adopted the well-worn defences against change that

in-house forecast risked providing spurious precision, that it could be mistaken

for a promise on where rates are heading and that the MPC was succeeding in

getting its message across without it.

     Deputy Governor Dave Ramsden said of Vlieghe's support for publishing a

rate forecast "Personally I have to say I am more sceptical .. I think our

communication is actually working well, I think it is consistently reaching

businesses and households, as surveys show."

     Ramsden and Carney insisted that the public and businesses had grasped the

key message that interest rates were likely to head gradually higher. 

     The latest Markit survey showed that 80% of households expect a rate rise

over the next year and Ramsden argued publishing a rate forecast could cloud

things. He said there was "a real risk .. that things get lost in translation,

that forecasts of interest rates can be seen as promises. We have seen a bit of

that with interpretation of our recent guidance so that would be my worry if we

went down the rate path course."

     --NEUTRAL RATE

     Market participants are not, on this view, the target audience for

guidance, although this is a stretch as mortgage and other rates that impact

households and business are priced off market curves.

     What market participants can look forward to is the MPC coming clean on

where the neutral interest rate may lie. Deputy governor Ben Broadbent once

managed to get through an entire speech and Q and A on the neutral rate without

putting a number on it but the Bank looks like it is going to open up a bit.

     "One area where it might be useful to do more is to talk a bit more about

where a neutral level of interest rates is," external MPC member Michael

Saunders said.

     Carney went on to state that the MPC's deliberation on the neutral rate

would be published in the August Inflation Report. 

     So market participants will get more of the kit to help assemble a view of

where the MPC is headed, just not the MPC's own views of where Bank Rate is most

likely to head.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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