Analysis: Little said the better? The Bank of England considers a communications reset

  • Markets Confused by BoE Signals Ahead of November Meeting
  • The yields of the British pound and gold fell after the change in the bank interest rate
  • BoE’s Bell says he wants to “train” the markets to understand better
  • Governor Bailey thinks less direction is needed
  • Investors still expect the Bank of England to raise interest rates in December

LONDON (Reuters) – The Bank of England is rethinking how it is signaling what its next monetary policy moves are likely to be, after a far-fetched misunderstanding this month when it smashed market expectations of a rate hike.

New chief economist Howe Bell said he plans to “train” central bank monitors to better understand the Bank of England, while Governor Andrew Bailey suggested the solution should be less.

Economists say they don’t want to get cues on when the BoE will raise rates – but they need a clear sense of the relative importance it attaches to different data, especially with inflation recently rising to a 10-year high.

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“There has been a great deal of confusion about what the bank is or is not referring to,” said Philip Shaw, chief economist at Investec. “Less confusion will be better for everyone.”

The Bank of England is widely expected to be the world’s first major central bank to raise interest rates, as Britain faces widespread supply chain difficulties and a booming labor market as it emerges from the COVID-19 pandemic.

But on November 4, the Bank of England kept its key rate on hold at 0.1%, sharply at odds with broader financial market rates that saw a nearly 100% chance of a rise to 0.25%, although in line with a narrow majority of Economists in a Reuters poll.

The market reaction was immediate and extreme. Sterling suffered its biggest daily drop against the dollar in more than 18 months, and two-year bond yields fell more than on the day of the shock result of the June 2016 Brexit referendum.

None of the BoE policymakers have said explicitly that interest rates will rise in November, but financial markets viewed Bailey and Bell’s comments as indicating they would.

Billy said On October 17 he was signaling to markets that the Bank of England would have to act if it saw a threat to its medium-term inflation outlook, while Description of the contraceptive pill November as a “finely balanced” meeting to raise interest rates.

In this case, both chose to wait for more data on the impact of the end of the government’s job-protection leave program, and the MPC voted 7-2 to leave rates unchanged.

Bell, the former chief European economist at Goldman Sachs, said last week that recent events showed a lack of common understanding between the BoE, markets and the media.

“What I would like to do, which I would probably say is a bit caring, but what I’m going to say anyway… is we try to train people to think the right way through politics,” the economics conference said.

“Some volatility in that environment is inevitable,” he added. “But what I’m hoping is that we take some of that cost up front, and I think we’ve done that.”

Bailey said he may downplay the guidance, adding that the full interpretation of the BoE’s world view – and its implications for interest rates – risks misunderstanding while economic data and BoE assessments have been choppy.

“There is an alternative view that we should go to the meeting and not give any direction,” he told lawmakers on Tuesday. “This is a well-reached ground by the MPC and I can imagine we’re going back to that.”

Jonathan Haskell, a member of the Foreign Monetary Policy Committee, said this week that it was better to communicate the medium-term forecast for policy than “price forecasts minute by minute and month by month.”

Christmas Crunch?

If the BoE is trying to teach market participants that there is no certainty about an interest rate decision, that message is struggling to get across.

At the start of the week, markets were still pricing in a near 100% chance of a rate hike to 0.25% on December 16, after the next MPC meeting, although on Friday it fell below 60%, largely on news about a possible new COVID-19 outbreak. -19 variable.

Craig Inches, head of pricing and cash at Royal London Asset Management, predicted more market turmoil if prices do not rise as expected, especially in thin and volatile year-end trade.

“It is a pressure point that the Bank of England should be aware of,” he said.

In his view, uncertainty about Britain’s labor market and COVID-19 justified delaying the rate hike until February.

The Bank of England closed last month Informal Briefings For big financial firms, which were previously seen as a tool to better understand markets and promote political messaging but have faced criticism for their lack of transparency.

The Bank of England is not the only central bank that the markets have misread.

In 2013, the US Federal Reserve unleashed a so-called “taper tantrum” that raised borrowing costs globally as it began cutting stimulus. And early in the pandemic in 2020, European Central Bank President Christine Lagarde retracted her comments that she was not aiming to manage bond yield spreads.

Economists say both central banks have learned from experience and refined their communications.

Few economists are seeking to return to the tough forward guidance pioneered by Bailey’s predecessor, Mark Carney, at the Bank of England in 2013. This was intended to allay fears that the BoE could harm the economic recovery, but it has had to be adjusted frequently due to the ongoing decline in the unemployment rate to which it was related.

But excessive ambiguity would bring its own problems, especially since the Bank of England’s economic outlook uses market interest rate expectations as a key input, Investec’s Shaw said.

“Markets should be free to make their decisions without being spoon-fed. But on the other hand, I think it would be a mistake for a central bank not to give the markets a good impression of what it was thinking, and perhaps a direction towards its intentions as well.”

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Additional reporting by Sujata Rao; Editing by William Schomberg and Emilia Sithole Mataris

Our criteria: Thomson Reuters Trust Principles.


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