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MNI STATE OF PLAY: BOE R* Rising; Need Tightening To Stand Pat

MNI (London)
--A Hawkish Hike: BOE MPC Voted 9-0 For 25 Bps Increase 
--Brexit The Wild Card In BOE Policy Outlook
By David Robinson
     LONDON (MNI) - The Bank of England Monetary Policy Committee's (MPC's)
decision to raise Bank Rate by 25 basis points to 0.75% was expected, but the
unanimous vote in favour was not and the accompanying analysis pointed to
further tightening to come.
     The MPC's assessment was that the equilibrium interest rate is rising, so
Bank Rate will need to rise just to keep the degree of stimulus constant. BOE
Governor Mark Carney, however, stressed that Brexit developments could yet
derail a smooth upward path for interest rates.
     Ahead of the announcement market rate expectations were for Bank Rate to
move up at glacial pace, only reaching 1.25% in five years' time.
     The MPC published for the first time its collective judgement on where R*,
the trend real interest rate lies, putting it in a 0% to 1% range, corresponding
to Bank Rate of 2% to 3%.
     The current equilibrium real rate for the UK, r*, that is the rate which
neither stimulates nor retards economic activity, for the UK, was assumed to lie
somewhere below R* in part because of fiscal tightening and elevated uncertainty
over Brexit.
     Carney said that "r* is not a direct guide to the setting of monetary
policy" but he added that it was " expected to rise gradually. Policy needs to
walk - not run - to stand still."
     Bank Rate may not need to rise all the way to the 2% to 3% range for R*,
because of the temporary factors pushing down on r*, and market participants
will have to predict how close to it will go.
     Market participants "can make a judgment ... how likely are those factors
to go away," Carney said.
     The key questions he identified for deciding how fast r* would rise were
whether uncertainty would increase or decrease and "the principal issue that
occupies a lot of people's minds here, Brexit."
     While the MPC is assuming the equilibrium rate is still well below its
pre-financial crisis level it still suggests that Bank Rate could well rise to
at least 1.5%, the level around which the MPC has said quantitative easing
unwind will begin.
     "It is not necessarily the case that the lower level of equilibrium
interest rates...means that QE has to remain on the balance sheet. You could
envisage a more extreme scenario where that may be the case but as it happens in
terms of the judgement of the Committee that is not the case provided the
shorter term factors dissipate over time," Carney said.
--MNI London Bureau; tel: +44 203-586-2225; email:
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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