MNI INSIGHT: BOE To Stay Cool As Gilts Yields Heat Up

The Bank of England is unfazed by rising gilt yields, and is likely to remain so in the absence of severe market disruption.

Ahead of the monetary policy committee's March meeting there was much market commentary about its potential response to the global surge in yields, but in the event the MPC merely referred to upside news, including U.S. fiscal stimulus and fast vaccine rollouts, and noted that financial conditions had not tightened.

This hands-off approach looks set to continue. The view at the Bank, articulated by Deputy Governor Ben Broadbent, is that gilt prices reflect many factors, including international capital flows and U.S. yield changes, so the idea of the MPC 'talking to the curve' to shift it up or down would be foolish.

Broadbent has in the past pointed to research showing the correlation between different countries' forward yields, and noted that spikes in gilt yields do not necessarily mean that market expectations of Bank Rate borrowing costs have risen. This means that the Bank can holds its guidance steady even as gilt prices fall without being out of synch with market expectations, he notes.

OPAQUE MEASURES

A key part of the Bank's policy approach that remains opaque to outside observers is its tracking of changes in financial conditions.

Bank economists produce a Monetary and Financial Conditions Index, which weights short-term interest rates, sterling, equity prices and household and other credit conditions according to their expected GDP impact. However, it publishes neither these weights nor the underlying data, some of which is comes from external providers and is commercially sensitive, leading some to charge that it may simply use the index to draw conclusions that suit its hand-off approach.

The March minutes noted that the index was "broadly unchanged," with offsetting impacts from easier mortgage credit conditions and an appreciation in sterling.

The Bank will undoubtedly provide further commentary on the evolution of financial conditions in the May Monetary Policy Report. Even if yields were to rise further, the MFCI could again show no tightening in conditions if, say, equities were to rally and mortgage conditions to ease.