MNI POLICY: BOE MPC in 'Hawkish Hike', Rate At 9-1/2 Yr High

--BOE MPC Votes 9-0 For 25 Bps Hike In Bank Rate To 0.75%

By David Robinson, Jai Lakhani and Jamie Satchi

     LONDON (MNI) - The following are the key points from the August MPC

monetary policy decision and inflation report, published Thursday by the Bank of

England (BOE):

     - The BOE Monetary Policy Committee (MPC) members all voted for a 25bps

rate hike in August, confounding market expectations for at least one dissenting

vote in favour of no change. The decision and accompanying commentary amounts to

a hawkish hike.

     - All MPC members voted together for a hike for the first time since May

2007, resulting in the Bank Rate rising to 0.75%. This is the highest Bank Rate

since February 2009 when the Bank Rate was 1.0%. All the MPC agreed that

"ongoing tightening of monetary policy ... would be appropriate" if the economy

evolved as projected.

     -August's Inflation Report included for the first time an estimate of the

equilibrium real interest rate (R*). The range for R* given by the BOE was

0%-1.0%, with a modal estimate of 0.25%. This range had fallen by more than 2

percentage points since 1990 when it was estimated to have been between

2.25%-3.25%, with a modal estimate of 2.5%.

     -The bottom of the MPC R* range, corresponding to nominal Bank Rate of

2-3%, is above market implied expectations for Bank Rate, of 1.25% five years

ahead. While r*, the short term equilibrium rate fluctuates, at face value this

still suggests Bank Rate should rise further than markets are assuming.

     - In contrast to May's inflation report, August's forecast meant that

inflation is anticipated to remain above the 2.0% target throughout the forecast

period. The latest 2.0% fall in sterling between May and August has driven this

upward revision, and the decline in rate expectations also gave inflation an

upwards nudge.

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

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