MNI POLICY: BOE Chiefs Oppose Regular Rate Path Steer

As UK market interest rate expectations soar to multi-decade highs, renewed calls for the Bank of England to publish regular rate projections of either the collective Monetary Policy Committee or individual MPC members are facing ingrained opposition at the top of the Bank.

The MPC instead looks likely to continue with its ad hoc approach of typically offering no comment on market rate paths while pushing back only when it believes rate expectations are a long way from what it thinks will be needed to get inflation sustainably back to target.

The lack of transparency over rate paths and the MPC’s emphasis on data-driven policy appear to be fuelling rate surprises, with the 50-basis point rate hike in June not foreseen by a single analyst in the Bank's own survey. There is now uncertainty over whether it will provide any push back against current market rates in August.

On Thursday, market implied pricing of the Bank's policy rate hit a post-Global Financial Crisis high, with a 6.5% peak fully priced in. In the run up to, or at, its August meeting the MPC may well have to decide whether to explicitly push back against such pricing. But opposition at the Bank to guiding expectations by regularly publishing the committee’s or individual members’ optimal policy paths runs deep.

PUSH BACK

Silvana Tenreyro, who stepped down from the MPC last week, said recently that after serving two terms, she had come to the view that the advantages of members publishing their own views (or paths) on future policy “outweigh the potential costs."

Her call for greater transparency echoes that of former MPC member Gertjan Vlieghe, who brought the argument to a head in 2018 when he persuaded policymakers to debate the pros and cons of publishing rate paths. But deputy governors Ben Broadbent and Dave Ramsden both publicly pushed back against the idea and they are both still in place -- Broadbent's term lasts until 30 June 2024 and Ramsden's until mid- 2027. The only MPC member scheduled to depart shortly is Deputy Governor Jon Cunliffe, who leaves at end October, but he is responsible for the financial stability wing and not a key voice in monetary policy communication.

With the opponents of publishing their own rate paths still in place and the leading proponents having left, there is no sign of the Bank giving ground. Ramsden has highlighted the risk of rate forecasts being seen as amounting to nothing more than promises.

ECHO CHAMBER

A more formal argument against enhanced central bank transparency, which has had its adherents among policymakers at the BOE, has been set out repeatedly in recent years by Hyun Song Shin, head of research at the Bank for International Settlements.

"The louder the central bank talks, the more likely it is to hear its own echo," Shin said. More formally, his research suggests that "the signal value of financial market prices is impaired when market participants place too much weight on the central bank’s pronouncements."

Last November, Broadbent and colleagues did push back against market expectations at the time with Broadbent saying at the post-MPC meeting press conference that rates weren't "likely to have to go as high as 5.25%." But the policy rate is now at 5.0% and heading higher.

If the Bank were to argue again that rate expectations are overblown, the questions over why it will not publish its own optimal rate path to demonstrate the point are likely to only intensify.