Analysis: less said, the better? Bank of England considers communication reset

  • Markets Confused by BoE Signals Before November Meeting
  • British pound and government bond yields plummeted after unchanged bank rates
  • BoE’s Pill Says It Wants To ‘Train’ Markets To Better Understand
  • Governor Bailey sees calls for less guidance
  • Investors still expect BoE to raise interest rates in December

LONDON, Nov. 26 (Reuters) – The Bank of England is rethinking how it indicates its likely next monetary policy moves, after a major misunderstanding this month when it knocked market expectations of a rate hike.

New chief economist Huw Pill has said he plans to “train” central bank officials to improve understanding of the BoE, while Governor Andrew Bailey suggested less could be the solution.

Economists say they don’t want babysitting signals about when the BoE will hike rates — but they do need a clear idea of ​​the relative importance it attaches to various data, especially with inflation recently hitting a 10-year high. year has reached.

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“There has been a significant amount of confusion about what the bank is and isn’t signaling,” said Philip Shaw, chief economist at Investec. “Less confusion would be better for everyone.”

The BoE is widely expected to be the first of the world’s largest central banks to raise interest rates as Britain faces widespread supply chain problems and a vibrant job market due to the COVID-19 pandemic.

But on Nov. 4, the BoE held its key interest rate at 0.1%, sharply contradicting broader pricing in financial markets that saw a near 100% chance of a rise to 0.25%, albeit in line with a narrow majority of economists in a Reuters poll.

The market reaction was immediate and extreme. Sterling suffered its largest daily decline against the dollar in more than 18 months, and two-year yields fell more than on the day of the shocking outcome of the June 2016 Brexit referendum.

No BoE policymaker had explicitly said interest rates would rise in November, but financial markets had regarded Bailey and Pill’s comments as implied.

Bailey said on Oct. 17 that he signaled to markets the BoE should step in if it saw a threat to medium-term inflation expectations, while Pill described November as a “finely balanced” meeting for a rate hike.

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

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

“What I’d like to do, which might be a little patronizing to say, but what I want to say anyway… is we try to train people to think through policy the right way,” he told an economics conference. .

“Some volatility in that environment is inevitable. But what I hope is we take a little bit of that upfront cost, and I think we did,” he added.

Bailey said he could scale back guidance, adding that explaining fully the BoE’s worldview — and its implications for interest rates — risked misunderstanding, while economic data and the BoE’s own assessments were fluid.

“There is an alternative view, which is that we should meet by meeting and not give advice,” he told lawmakers on Tuesday. “That has been entered very well by the MPC and I imagine we will come back to that.”

Jonathan Haskel, an outside MPC member, said this week it was better to communicate the medium-term outlook for the policy than the “minute-by-minute, month-to-month outlook for tariffs”.

CHRISTMAS CRUNCH?

If the BoE tries to teach market participants that no interest rate decision is a certainty, that message will struggle to get through.

At the start of the week, markets still had a nearly 100% chance that yields would rise to 0.25% on December 16, after the next MPC meeting, although that fell below 60% on Friday, largely due to news of a possible new COVID-19 virus. -19 variety.

Craig Inches, head of rates and cash at Royal London Asset Management, predicted more market turmoil if interest rates don’t rise as expected, especially in thin and choppy year-end trading.

“It’s a bit of a stress point that the BoE needs to be aware of,” he said.

From his perspective, uncertainty over the UK labor market and COVID-19 would justify postponing a rate hike until February.

Last month, the BoE ended policymakers’ off-record briefings to major financial firms, previously seen as a tool to better understand markets and reinforce policy messages, but have been criticized for their lack of transparency.

The BoE is far from the only central bank misread by the markets.

In 2013, the US Federal Reserve triggered a so-called ‘taper tantrum’ that increased borrowing costs worldwide as it began to unwind stimulus measures. And at the start of the pandemic in 2020, European Central Bank President Christine Lagarde backed down on her comments that her intention was not to manage bond yield spreads.

Both central banks have learned from the experience and refined their communications, economists say.

Few economists aspire to return to the rigidly progressive guidance pioneered on the BoE in 2013 by Bailey’s predecessor, Mark Carney. That was intended to allay concerns that the BoE would hurt the economy’s recovery, but it had to be reviewed regularly due to a steady decline in the unemployment rate to which it was stuck.

But excessive vagueness would pose its own problems, especially since the BoE’s own economic forecasts use market rate expectations as a key input, Investec’s Shaw said.

“Markets should be free to form their own opinions without being spoon fed. But on the other extreme, I think it would be wrong for a central bank to fail to give the markets a good impression of what it was thinking, and perhaps a steering also toward his intentions,” he said.

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Additional reporting by Sujata Rao; Editing by William Schomberg and Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Trust Principles.

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