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

--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%.

     --UK EQUILIBRIUM

     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.

     --KEY QUESTION

     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: les.commons@marketnews.com

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

[TOPICS: M$B$$$,M$E$$$,MX$$$$,M$$BE$]