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MNI (London)
--MPC Set For 25 Bps Hike; To Publish R* Estimate
--Bottom Of R* Range Not Below -0.5%; Probably Higher
By David Robinson
     LONDON (MNI) - The Bank of England looks set to deliver a 25 basis point
rate hike following the Monetary Policy Committee's (MPC's) Super Thursday
policy announcement, alongside publishing an estimate of the equilibrium real
policy rate for the first time 
     It would be a big surprise if there was no hike or if its mid-point
equilibrium rate, or r*, estimate was below -0.5%, that is 1.5% for nominal Bank
Rate. The MPC's new guidance is that an unwind of quantitative easing (QE) will
kick-in when Bank Rate is around 1.5% and if its r* estimate were to be below
this it would suggest this tightening cycle may end with no unwind. 
     The MPC has previously shied away from putting a collective number on r*,
the policy rate consistent with no output gap and inflation at the 2.0% target.
In its August Inflation Report it will go public with its views, but it is
likely to publish a range for r* rather than a point estimate, reflecting both
the uncertainty around it and members' divergent views.
     Individual MPC members have been fairly open about their thinking on r*,
but the Treasury Select Committee (TSC) has sought clarity from them. The common
assumption is that r* has been heading higher, as some of the downward
influences on it, notably private sector deleveraging and fiscal tightening in
the UK, have eased and, more controversially, the productivity outlook may have
     "I have previously said that I thought the equilibrium nominal rate for the
UK was between 1 and 3 per cent. In 2015, I thought we were probably at the low
end of that range. Now I think the risks are more symmetric within that range,"
Vlieghe said in evidence to the TSC on May 22.
     One complexity for the MPC in commenting on r* is that it changes through
time, and the committee could argue that it will be higher at the end of its
three year forecast horizon than at the start. 
     MPC member Silvana Tenreyro told the TSC that she thought "long term
equilibrium real rates are ... not as low as existing measures of equilibrium
real rates suggest, both because part of the fall in rates during the crisis
will eventually reverse, and also because long term productivity growth may not
be as slow as existing measures indicate."
     Another complexity is that unwinding of QE could push down on r*. If the
MPC raised Bank Rate to, or above the 1.5% unwind trigger point, it would then
take the view that the equilibrium rate was lower, leading to it doing less
tightening via Bank Rate. 
     Consistent with this, Deputy Governor Ben Broadbent said on Jul 23 that the
MPC would cut Bank Rate before halting whatever unwind was going on.
     Away from r*, the widespread assumption is that the majority on the MPC
will back a 25bps rate hike. A hike looked likely in May but the MPC delayed in
order to see if the sharp deceleration in the first quarter was primarily a
weather related aberration, and the latest data have largely supported this
     Deputy Governor Jon Cunliffe, who is sceptical that pay growth will move a
step higher, has called for a "stodgy" approach to policy, suggesting he may
dissent from a hike, but the other members look likely to be in favour of
increasing Bank Rate.
--MNI London Bureau; tel: +44 203-586-2223; email:
--MNI London Bureau; +44 203-586-2226; email:
--MNI London Bureau; +44 203 865 3828; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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