- The Bank of England is making it very clear that it plans to hike interest rates more than once in 2018.
- The bank’s communications have been unusually forthright in its last handful of announcements.
- “Former Governor of the Bank of England, Mervyn King, once argued that a successful monetary policy should be ‘boring.’ On that criteria, the week’s developments suggest that the current MPC may not be doing too well,” Martin Beck, lead UK economist at Oxford Economics wrote.
LONDON — Listen up. Interest rate hikes are coming, and they’re coming at you fast.
That’s the message the Bank of England is delivering, and it is doing so in the clearest possible manner for a central bank.
Central bank communication is a famously nuanced and often obtuse art, with the change of a single word in a policy statement able to shift perceptions and move markets.
Now however, the Bank of England is practically shouting at the British people and the markets.
On Thursday, after holding rates in a unanimous vote of its Monetary Policy Committee, the Old Lady of Threadneedle said that policy could be “tightened somewhat earlier and by a somewhat greater extent over the forecast period” if the economy continues to grow as forecast.
“It will be likely be necessary to raise interest rates to a limited degree in a gradual process, but somewhat earlier and to a somewhat greater extent than what we had thought in November,” Governor Mark Carney then said in a press conference after the announcement.
For the average reader, those words likely seem fairly dry, and reasonably non-committal — but in the world of central bank-eze, that’s as clear as it gets.
“Former Governor of the Bank of England Mervyn King once argued that a successful monetary policy should be “boring”. On that criteria, the week’s developments suggest that the current MPC may not be doing too well,” Martin Beck, lead UK economist at Oxford Economics wrote on Friday, summarising the unusually vocal approach the Bank of England is taking to its policy.
“The publication of a surprisingly hawkish Inflation Report led the markets and ourselves to significantly reappraise the future path of Bank Rate.”
The Bank made it even clearer it isn’t bluffing when on Friday, Ben Broadbent — deputy governor for monetary policy, and Carney’s effective number two — gave an interview to the BBC’s Wake Up To Money.
Broadbent, who is one of the BoE’s best communicators, was pretty much as unequivocal as a policymaker can be in public about the future path of interest rates, saying that should rates rise to 1% by the end of 2018, it would “hardly be a terribly big rise.”
“We don’t make promises about future interest rates,” Broadbent was at pains to say, before effectively doing the opposite.
“There’s nothing terribly dramatic going on here. The MPC said that they thought it likely that any rate rises required over the next two to three years would be limited and gradual. We wanted to emphasise that point yesterday. Yes, the path looks slightly higher, and rate rises may come a little bit sooner than expected in November.”
“We do not fix the path of interest rates in advance. What is fixed is our remit, and rates change with the economy. Let’s be clear, doubling of interest rates from 0.5% is hardly a terribly big rise.”
“There’s a reason they’re low, there’s all sorts of long term reasons as to why globally the level of interest rates required to keep inflation stable has been much lower than in the past,” he continued.
“But nor do I think if there were to be a couple of 25 basis point rises in a year, that that would somehow be a great shock.”
The bank’s aggressive communication strategy appears to be doing the trick. Markets are now pricing a hike in May, the next time the quarterly Inflation Report is released — with BNP Paribas suggesting at least a 75% chance of a hike.
By August, the probability is now seen as 100%, according to market expectations.
The bank generally only changes policy on the day of an Inflation Report, as Governor Carney holds a press conference on those days, giving the bank a greater ability to communicate its reasoning behind decisions to the markets and wider public.
“Our expectation that the MPC will go for a further 25 basis points rise in Bank Rate in May has been reinforced and we now expect a second hike in 2018 in November.”
Source: Business Insider