Analysis: Less said, the better? The Bank of England is considering resetting communications

  • Markets are confused by BoE signals ahead of the November meeting
  • Sterling and gold rates fell after unchanged bank rates
  • BoE’s Pill says he wants to ‘train’ markets to understand better
  • Governor Bailey sees reason for less guidance
  • Investors still expect the BoE to raise interest rates in December

LONDON, Nov 26 (Reuters) – The Bank of England is reconsidering how it signals what its next monetary policy move is likely to be, following a violent misunderstanding this month as it shattered market expectations of a rate hike.

New chief economist Huw Pill has said he intends to “train” central bank observers to improve understanding of the BoE, while Gov. Andrew Bailey suggested that less may be the answer.

Economists say they do not want to be fed signals about when the BoE will raise interest rates – but they need a clear sense of the relative importance it places on various data, especially with inflation recently hitting a 10- annual high point.

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“There has been a significant degree of confusion over what the bank has signaled or not signaled,” 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 major central banks to raise interest rates, as the UK faces widespread supply chain difficulties and a lively labor market when it comes out of the COVID-19 pandemic.

But on November 4, the BoE kept its key interest rate on hold at 0.1%, in sharp contrast to broader pricing in the financial markets, which saw an almost 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 biggest daily fall 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 vote.

No BoE politician had explicitly said interest rates would rise in November, but financial markets had seen comments from Bailey and Pill as a hint that they would.

Bailey said on October 17 that he was signaling to markets that the BoE would have to act if it saw a threat to inflation expectations in the medium term, while Pill described November as a “finely balanced” meeting for a rate hike.

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

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

“What I would like to do, which may be a little condescending to say, but as I would like to say anyway … is that we are trying to train people to think the right way through politics,” he told an economics conference.

“Some volatility in that environment is inevitable. But what I hope is that we take some of these costs in advance, and I think we have,” he added.

Bailey said he could scale down the guidance, adding that a full explanation of the BoE’s worldview – and its implications for interest rates – risked misunderstandings, while economic data and the BoE’s own assessments were fluid.

“There is an alternative view, which is that we should go face to face and not give any guidance,” he told lawmakers Tuesday. “It’s very well done by the MPC, and I could imagine we’ll go back to that.”

Jonathan Haskel, an external MPC member, said this week that it was better to communicate the prospects for policy in the medium term than the “minute-by-minute, month-by-month outlook for interest rates”.


If the BoE is trying to teach market participants that no interest rate decision is a security, that message has had a hard time getting through.

At the start of the week, markets still priced an almost 100% chance that prices would rise to 0.25% on December 16 after the MPC’s next meeting, although it fell below 60% on Friday, mainly due to news about a possible new COVID-19 -19 variant.

Craig Inches, head of rates and cash at Royal London Asset Management, predicted more market turmoil if interest rates did not rise as expected, especially in thin and choppy trading by the end of the year.

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

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

Last month, the BoE ended policy-makers’ off-record briefings on large financial firms, which were previously seen as a tool to better understand markets and reinforce political messages, but were criticized for their lack of transparency.

The BoE is far from the only central bank that has been misunderstood by the markets.

In 2013, the US Federal Reserve triggered a so-called ‘taper tantrum’ that raised borrowing costs globally as it began to reduce stimulus. And early in the 2020 pandemic, the President of the European Central Bank, Christine Lagarde, calmed down on her comments that she did not intend to control bond yield spreads.

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

Few economists seek a return to the rigid forward-looking guidance that pioneered BoE in 2013 by Bailey’s predecessor, Mark Carney. It was intended to allay concerns that the BoE would hurt the economy’s recovery, but it had to be revised frequently due to a steady fall in unemployment to which it was tied.

But excessive vagueness would bring its own problems, especially as BoEs’ own economic forecasts use market interest rate expectations as a key input, Investecs Shaw said.

“The markets must be free to decide their own opinions without being fed a spoon. But in the other extreme, I think it would be wrong of a central bank not to give the markets a good idea of ​​what it was thinking, and perhaps a steering also in the direction of its intentions, “he said.

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

Our standards: Thomson Reuters Trust Principles.


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