REPEAT: MNI STATE OF PLAY: BOE All Set For Hike, 'R Star' Est

Repeats Story Initially Transmitted at 08:25 GMT Jul 26/04:25 EST Jul 26

--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

improved.

     "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.

     --SHOOTING STARS

     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.

     --IN THE STARS

     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

view.

     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: david.robinson@marketnews.com

--MNI London Bureau; +44 203-586-2226; email: jamie.satchithanantham@marketnews.com

--MNI London Bureau; +44 203 865 3828; email: jai.lakhani@marketnews.com

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