Tommy Wilkes, Saikat Chatterjee

LONDON, (Reuters) – Investors criticized the Bank of England for failing to deliver an interest rate increase they had hoped for on Thursday. This could be a warning sign that central banks all over the globe are working hard to maintain a balance between inflation risk and economic growth.

Although economists do not expect https://www.reuters.com/world/uk/bank-england-raise-rates-025-q1-possibly-sooner-2021-10-21 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.

The vote of 7-2 against tightening policy on Thursday triggered a drop in sterling prices and an increase in the price of government bonds. Money markets, which had previously priced in another hike in January, pushed their wagers back to February.

“Pathetic communication by the BoE. Bailey marched us uphill, then voted for rate stability,” stated Peter Kinsella (head of FX, Swiss private bank UBP).

They will not be friends on the market.

Bailey defended the decision https://www.reuters.com/world/uk/bank-england-wrong-foots-markets-keeps-rates-hold-2021-11-04 in a news conference, saying policymakers had never indicated they would act at a particular meeting. If the economy is performing as it should, the BoE states that rates will need to be raised in the next months.

Bailey rejected the suggestion of a reporter that Bailey was “unreliable boy number two,” which is a term first used in 2014 by a lawmaker to describe Mark Carney’s predecessor, who failed to act on his rate-moving signals.

Bailey laughed and said, “It is not mandatory for a Governor of the Bank of England be an unreliable partner.”

He said that while monetary policy may not be able to reduce inflation, inflation expectations for the longer term have risen less.

The BoE’s Thursday events showed that they “have a huge communication problem, complete stop,” stated Paul O’Connor from Janus Henderson, Head of Multi-asset.

“The big question is: Why has the Governor sounded so hawkish the last few months while in speech after speech, he clearly nudged the market’s expectations higher?”

CREDIBILITY

It isn’t just the BoE that has misunderstood markets over recent weeks. They can also be accused of confusing messaging.

The Reserve Bank of Australia https://www.reuters.com/business/australias-central-bank-holds-rates-drops-yield-target-2021-11-02 last week stood by as markets busted its 0.1% target on three-year bond yields. In a UBP Kinsella-branded “capitulation”, it dropped its target, and the agreed rates may rise prior to a previously flagged date of 2024.

Euro zone bond yields rose after the European Central Bank https://www.reuters.com/world/europe/ecb-push-back-over-mounting-rate-hike-expectations-2021-10-27 came across as too timid last week in pushing back against markets’ interest rate projections. The Bank of Canada https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 meanwhile surprised hawkishly, saying it could hike as early as April.

Janus Henderson’s O’Connor stated that the difficulties markets have in understanding central banks reflect both the uncertain outlook for prices and central bank adoption of flexible inflation targets.

The BoE does not belong to that group. So with survey-based price expectations at 13-year highs https://www.reuters.com/world/uk/uk-inflation-expectations-highest-since-2008-before-boe-rate-decision-citiyougov-2021-10-26 and annual inflation seen at 4.25% by end-2021, money markets had priced in a 15 basis-point rate rise for this week and another 25 bps hike next month.

There is more uncertainty about central bank’s reaction function. There has not been conflict until now — they had been sustaining growth, because inflation wasn’t a concern,” O’Connor explained. O’Connor urged banks for clarity about which objectives they prioritize.

The market now anticipates a total of 97 bps in BoE increases by November 2022, compared to 120 bps at the beginning of this week.

Some investors disagree with the BoE’s assertion that they were misled by its peers.

For example, the pricing for a July 2022 ECB rate rise was never in line with bank communications or the bloc’s economic data.

Some analysts said market pricing for a BoE tightening on Thursday had been exaggerated by technical factors, while others said traders had misinterpreted recent comments by policymakers https://www.reuters.com/article/britain-boe-quotes-idUSKBN2HM27B including Bailey and the BoE’s new chief economist Huw Pill.

Simon French from Panmure Gordon, chief economist, stated that “people positioned incorrectly ahead of today’s BoE rate decision”