The Bank of England (BoE) have today raised interest rates to 0.75%, the highest level in almost 10 years. It would have been a total shock however, if they did not raise the interest rate given the market had it priced in for a number of weeks without any Monetary Policy Committee (MPC) communication of resistance. So on to the next question – was it going to be a dovish or hawkish hike? Well, the answer was it depends on your view on Brexit.

The bank rate is a blunt tool for the MPC and there are a myriad of factors which enter into the collective judgement as to what level of interest rates the economy needs. The largest of all of the factors is without a doubt Brexit, which appears to be the most inscrutable issue to analyse that a Central Bank could ever face. It is not only a standalone factor, it permeates all of the others such as productivity, fiscal constraints, investment, consumer confidence, the level of currency etc.

The BoE also came up with a new way to tie itself in knots – the introduction of the “equilibrium interest rate” (the level of interest rate that would keep the economy in balance – not too hot and not too cold), which in nominal terms is apparently 2-3%. So the question on this is; “How can the BoE confirm the market pricing of another two rate hikes in three years, moving to a 1.25% bank rate, which is so far below their estimate of a neutral rate? The answer; Brexit.

The Governor was quite clear about how important Brexit is, and his guidance to the market appears to be that you need to make your mind up on what kind of Brexit we will get in order to forecast long term yields.

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