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--BOE Guidance Seen For The Broader Economy, Not Markets
By David Robinson
LONDON (MNI) - The Bank of England's forward policy guidance has become, to
borrow a political catch-phrase, 'for the many not the few', with financial
market participants now viewed as the few.
The Bank believes its guidance is working if the public and businesses
understand that interest rates are likely to head gradually higher and to peak
at historically low levels -- an aim Governor Mark Carney has stated is working
"The people we speak to first and foremost are households and businesses
across the country," Bank Governor Mark Carney said following the May 10
Inflation Report, adding that surveys showed more than three quarters of
individual respondents thought interest rates were likely to go up over the next
But such guidance is way too imprecise for financial market participants
and the recent messaging to them has mixed exhortations to respond to the
economic data with blunt warnings when rate expectations have been out of whack.
While the public appear to have understood the MPC's big picture, market
participants have struggled with the near-term policy outlook. Markets priced
in, then priced out a May rate hike and analysts are divided over whether the
next move higher comes in August, November or even into 2019.
And City-wide analysts and traders are not going to get any further help
from senior policymakers on that front.
"We're not going to spoon feed them (market participants)
meeting-by-meeting," BOE Deputy Governor Ben Broadbent said in a Daily Telegraph
interview published Wednesday.
"My own view is, having done it, and even accepting that it's maybe
analytically a harder job [than it once was], they can look after themselves,"
"Their [the City's] job is to put themselves in our shoes. We all have the
same data," he added
Forward guidance was a signature policy for Carney. He persuaded eight of
the nine members on the MPC to back "state contingent" forward guidance, based
on a 7% unemployment rate, in August 2013, with only external member Martin
Weale voting against.
That guidance proved ephemeral and, people familiar with the evolution of
Monetary Policy Committee thought note it has slowly and often without fanfare
evolved into a very loose form of words that include the phrase 'limited and
gradual' and is now largely irrelevant to internal debate.
With the formal policy guidance on rates for market participants skeletal,
Carney and his colleagues have intervened twice in recent months to bluntly
direct market expectations.
In the September 2017 minutes the MPC, faced with a market stubbornly
refusing to price in a near-term hike, warned that a hike could be expected in
Carney then used a BBC interview ahead of this May's meeting to give a
steer against another, widely expected, hike.
He and his colleagues hope, however, that markets will increasingly respond
to data developments, rendering obsolete the need for further verbal
Rate "expectations are moving with (data) releases .. they are better able
to anticipate what we can do. The need for direct pre-commitment .. to a rate
(move) goes away," Carney told lawmakers back on February 21.
The fact he had to intervene again in May when market participants had not
scaled back rate expectations following soft data suggested that Carney had been
over optimistic -- and Broadbent's faith in his erstwhile peers was misplaced.
Having postponed a rate hike in order to wait-and-see how the economic data
evolves after a soft first quarter, the hope is still that market rate
expectations will evolve in line with the MPC's perceptions as the data roll-in,
negating the need for spoon feeding.
--MNI London Bureau; tel: +44 203-586-2225; email: firstname.lastname@example.org
--MNI London Bureau; tel: +44 203-586-2223; email: email@example.com