BoE and other central banks annoy investors

Investors assailed the Bank of England on Thursday for not delivering an interest rate rise they had bet on, in what may be a sign of things to come as central banks around the world tread carefully to balance inflation risks and economic growth.

Although economists do not expect a first post-pandemic rate hike until early next year, investors had priced in a move after what they said were weeks of signalling by BoE policymakers, including Governor Andrew Bailey, that rates needed to rise.

Thursday’s 7-2 vote against tightening policy triggered a 1.5 per cent drop in sterling and a jump in government bond prices, while money markets that had also priced in a second hike before year-end pushed back their bets to February.

“Pathetic communication from the BoE. Bailey basically marched us up the hill, and then voted to keep rates steady,” said Peter Kinsella, head of FX at Swiss private bank UBP.

“They will have made themselves no friends in the market today.”

Bailey defended the decision in a news conference, saying policymakers had never indicated they would act at a particular meeting. The BoE says it will still need to raise rates in the coming months if the economy performs as expected.

Bailey rejected a suggestion by a reporter that he was “unreliable boyfriend number two,” a nickname first used by a lawmaker in 2014 to describe his predecessor Mark Carney, whose signals on rate moves failed to translate into action.

“It’s not compulsory for a governor of the Bank of England to be an unreliable boyfriend,” Bailey joked.

Monetary policy could do little to dampen inflation in the near term and longer-dated inflation expectations had risen relatively less, he added.

Thursday’s events show the BoE “have a big communication challenge, full stop,” said Paul O’Connor, head of multi-asset at Janus Henderson.

“The question is, why has the governor sounded so hawkish over the last couple of months when in speech after speech he has clearly nudged market expectations higher?”

Credibility

The BoE is not the only central bank to have wrong-footed markets in recent days and be accused of confused messaging.

The Reserve Bank of Australia last week stood by as markets busted its 0.1% target on three-year bond yields. It then dropped the target and agreed rates might rise before a previously flagged 2024 date, in a move UBP’s Kinsella dubbed “capitulation”.

Euro zone bond yields rose after the European Central Bank came across as too timid last week in pushing back against markets’ interest rate projections. The Bank of Canada meanwhile surprised hawkishly, saying it could hike as early as April.

Janus Henderson’s O’Connor said the difficulty markets are having in reading central banks reflected both the murky outlook for prices as economies recover from COVID-19 and the adoption by some central banks of more flexible inflation targets.