MNI POLICY: BOE Turns Quiet Again On Market Rates Bets

The Bank of England looks likely to return to its usual practice of eschewing commentary on market rates, as expectations for monetary policy have moved closer to the BOE’s own internal projections after its November foray into talking down the yield curve in the wake of September’s mini-Budget.

Longer-dated gilt yields in particular soared in the wake of the Sept 23 mini-Budget, whose unfunded tax cuts were unaccompanied by any official fiscal forecast from the Office for Budget Responsibility, and market expectations for the peak of interest rates jumped over 6%. In response Monetary Policy Committee members sought to talk down the curve both collectively and individually, and Bank Governor Andrew Bailey suggested in the press conference after the November meeting that the policy rate was likely to top out closer to 3% than to the market rate peak then calculated by the BOE at about 5.25%, which would be compatible with a peak around 4%. (See MNI POLICY: BOE Points To 4% Peak At Most, Then Rate Cuts)

With the fiscal waters now calmed, and rates peak pricing much lower, at around 4.6%, the BOE is returning to its usual taciturnity on the market curve. While this implied peak still appears to be well above the Bank’s own view, and with the BOE’s economic analysis little changed since Bailey’s comments the month before, MPC minutes after the December meeting, when Bank Rate was increased to 3.5%, contained not a single line of commentary on market rate expectations.

ENOUGH TRANSPARENCY FOR NOW

The MPC, unlike the Norges Bank and the Riksbank, does not routinely publish its in-house optimal policy projection, and nor does it set out individual policy paths in the way the Fed does with its dot plots. The closest it comes is to offer economic projections assuming either unchanged rates or market rates in each quarterly Monetary Policy Report.

Investors’ reaction to the mini-Budget, though, forced the BOE not only to temporarily resume purchases of gilts, but to spell out how far market views were straying from its own.

In a speech on Oct 20, BOE Deputy Governor for Monetary Policy Ben Broadbent broke with precedent by setting out the Bank's optimal policy projection. This charts a rate path seen as stabilising inflation and output, placing much greater weight on the former, and including some degree of rate smoothing.

Broadbent made the point that if Bank Rate were to be hiked in line with then market expectations to 5.25% from its starting point in the tightening cycle of 0.1%, the cumulative rate hikes would knock almost 5% off GDP, pushing the economy into a markedly deeper recession than it was already facing.

But, with the mini-Budget’s measures now reversed, the BOE’s period of relative openness seems to have concluded. The Bank has been institutionally averse to such transparency in the past and there is nothing to indicate that it will heed calls to change its way.

Broadbent himself has said that it is not the MPC's job to "spoon-feed" the markets. There has been a belief among some at the Bank that there would be costs if market participants become more dependent on BOE commentary rather than readjusting positions in line with data flow, a view which is contested but does have support in some academic work.