ANALYSIS-Unreliable boyfriends? BoE and other central banks annoy investors
By Tommy Wilkes and Saikat Chatterjee
LONDON, November 4 (Reuters) – Investors assaulted the Bank of England on Thursday for failing to achieve an interest rate hike they had bet on, which could be a sign of things to come as central banks around the world scramble to ” balance the risks of inflation and economic growth.
While economists don’t expect a first post-pandemic rate hike until early next year, investors had anticipated a move after what they said were weeks of reporting by policymakers in the BoE, including Governor Andrew Bailey, that rates were to increase.
Thursday’s 7-2 vote against the tightening policy triggered a 1.5% drop in the pound sterling and a rise in government bond prices, while money markets which had also forecast a second hike ahead of the end of the year pushed their bets back to February.
“Pathetic communication from the BoE. Bailey basically took us up the hill and then voted to keep rates stable,” said Peter Kinsella, head of foreign exchange at Swiss private bank UBP.
“They won’t have made any friends in the market today.”
Bailey defended the decision at a press conference, saying policymakers never indicated they would act at a particular meeting. The BoE says it will have to raise rates further in the coming months if the economy performs as expected.
Bailey dismissed a reporter’s suggestion that he was “unreliable boyfriend number two,” a nickname first used by a lawmaker in 2014 to describe his predecessor Mark Carney, whose signals about rate moves have not been translated into action.
“It is not obligatory for a Governor of the Bank of England to be an unreliable boyfriend,” Bailey joked.
There was little that monetary policy could do to curb short-term inflation, and longer-term inflation expectations had risen relatively less, he added.
Thursday’s events show the BoE “has a big communications challenge, period,” said Paul O’Connor, multi-asset manager at Janus Henderson.
“The question is, why has the governor seemed so hawkish over the past two months when speech after speech has clearly pushed market expectations higher?”
The BoE is not the only central bank to have offended markets in recent days and to be accused of confusing messages.
The Reserve Bank of Australia last week remained inactive as markets exceeded their 0.1% target on three-year bond yields. He then dropped the target and agreed rates could rise ahead of a previously reported date of 2024, in a move UBP’s Kinsella dubbed a “surrender.”
Eurozone bond yields rose after the European Central Bank was too timid last week in pushing back market interest rate forecasts. The Bank of Canada surprised hawkishly, saying it could rise as early as April.
Janus Henderson’s O’Connor said the difficulty markets are having reading central banks reflected both the bleak outlook for prices as economies recover from COVID-19 and the adoption by some central banks of targets more flexible inflation.
The BoE is not one of them. So, with price expectations based on surveys to 13-year highs and annual inflation of 4.25% by the end of 2021, money markets had forecast a 15bp rate hike for this. week and another 25 basis point hike next month.
“There are a lot more uncertainties about the reaction function of central banks. So far there has been no conflict – they were supporting growth because inflation was not an issue,” he said. O’Connor said, urging banks to better define what they were prioritizing.
Markets now expect a total of 97bp hikes from the BoE by November 2022 vs. 120bp at the start of the week RIPR.
Not everyone agrees that investors have been misled by the BoE and its peers.
The pricing of an ECB rate hike in July 2022, for example, was still at odds with the bank’s communications and the bloc’s economic data.
Some analysts said market prices for a BoE tightening on Thursday were overstated by technical factors, while others said traders misinterpreted recent comments from policymakers, including Bailey and the New Economist. in chief of the BoE, Huw Pill.
“People in the wrong position before the BoE’s interest rate decision today largely ignored the conditional nature of Pill and Bailey’s comments,” said Simon French, chief economist at Panmure Gordon.
Markets react to BOE policy decisionhttps: //tmsnrt.rs/2Ye2oLE
(Additional reporting by Sujata Rao and Dhara Ranasinghe; Editing by Sujata Rao and Catherine Evans)
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