“The Bank of England has blinked,” says Patrick Hosking in The Times. Despite its own forecasts that inflation will hit 5% next April, the Bank last week again opted to hold British interest rates at a “three-centuries low of 0.1%”. Quantitative easing (QE) will also continue.
Bad communication
The decision came as a shock to financial markets, which had been almost certain that a small interest-rate increase to 0.25% was coming. The pound had its worst week since August, while UK government bonds rallied as yields fell. Bank governor Andrew Bailey rejected accusations that the Bank had “bottled it”, saying that monetary policymakers are waiting for data on the impact of the end of the furlough scheme before acting. Investors should instead get used to the idea that rates are not heading up as fast as they thought, says Paul Dales of Capital Economics. While rates probably will rise to 0.25% in either December or February, it looks as though they will still only be 0.5% at the end of 2022.
Did bond “markets get ahead of themselves” by betting that inflation would force a rate hike? asks Jon Sindreu in The Wall Street Journal. No. “Markets didn’t imagine rates going up; the Bank of England told them they would.” As recently as last month Bailey said that central banks would “have to act” on rising inflation. In the coded world of central-bank speak this was taken as a clear signal of an impending rate hike that then didn’t materialise. By issuing such “unpredictable policy guidance” the Bank risks creating the kind of market turmoil it wants to avoid.
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Not for the first time, the Bank has a communication problem, says Alistair Osborne in The Times. After Mark Carney’s ever-shifting “forward guidance”, now we have Bailey’s flip-flopping about when interest rates will rise. This fiasco will only give succour to those claiming that “he got the job to help to bail out the government’s finances… Every 1% rise on interest rates and inflation could cost the Treasury £25bn a year.” Andrew Bailey? More like “Andrew Bailout”.
A monetary hangover
Compare the Bank’s cack-handed communication with the slicker approach taken by US Federal Reserve chair Jerome Powell, says Ben Wright in The Daily Telegraph. Powell has avoided “scaring the horses by being extremely transparent and consistent about his intentions.” Indeed, markets greeted news that the Fed will start to rein in stimulus by sending the S&P 500 stock index to new record highs. Both central banks are arguably tightening too slowly, but at least the Fed has “laid out a clear exit strategy from the era of ultra-loose monetary policy… The same, alas, cannot be said for the Bank.”
The Fed is on track to end its QE programme by the middle of next year, although US interest-rate rises seem further away, says Katie Martin in the Financial Times. Powell has exhibited that most prized of central banking qualities: “Being boring.” But the boredom might not last. Markets are already high on monetary stimulus and it will be a long time before support is withdrawn completely. That “sets the scene for a monstrous hangover further down the line”.
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