By Ven Ram, Bloomberg Markets Live Commentator and analyst
It is one thing to keep the markets guessing, it’s quite another to mislead them. Perhaps attempting to do the first, the Bank of England squarely ended up doing the latter for traders.
Ever since the September meeting minutes flagged that the central bank may be ready to raise rates before the expiry of quantitative easing in December, it was fair game for rates traders to prepare themselves for an increase in the Bank Rate sooner rather than later. As if to add fuel to fire, speaker after BOE speaker flagged how dangerous it might be to let inflation expectations become unanchored. Governor Andrew Bailey had himself remarked that “...we have got to in a sense prevent (inflation from) becoming permanently embedded because that would obviously be very damaging.” You get the idea. But come the time to walk the talk, they baffingly failed to follow through and voted contrary to what their statements would have suggested.
And it wasn’t as though the markets had positioned for a rate hike overnight. Gilts had been selling off for three full months through October, and the surge in yields was of a ferociousness not seen in years. And never did the BOE think it fit to push back on any of that market pricing despite numerous policy makers making comments left, right and center, day in and day out.
Sorry, Governor, if the BOE had managed its communication well, two-year gilt yields wouldn’t have tumbled a phenomenal 21 basis points. Nor would the pound have slumped the most this year. The most damaging part of the BOE’s recant is how markets behave down the line. What is a gilts trader to do the next time a policy maker expresses grave concern about inflation? Indeed, if inflation were not concerning enough to warrant a rate hike, why bother rattling everyone’s cage with comments that suggested otherwise?
Former Federal Reserve Chairman Alan Greenspan had perfected the art of confounding the markets with his cryptic comments, without ever misleading them. The markets, alas, won’t say the same thing about the BOE. If markets had the power to appraise the Bank of England on its communication strategy, they would give it the lowest possible score.