The costs of miscommunication on Threadneedle Street

The Bank of England isn't the only central bank with communication problems. This matters, big time.

  • Several major central banks in recent weeks denied they play a role in steering market expectations of policy rates—destabilising the yield curve;

  • At the Bank of England (BOE) a series of communication mis-steps since Sept. aggressively re-priced Sterling assets;

  • As a result, markets also began questioning forward guidance frameworks elsewhere—causing a whipsaw in pricing across rates markets;

  • It might be that potential global spillovers were a key motivation behind the Bank’s decision to disappoint market pricing last week;

  • Regardless, MPC unwillingness to guide rates markets is not only amateur, but contradicts a pillar of the BOE’s own policy on balance sheet unwind—that with clear communication it need not impact the yield curve;

  • Failure to correct communication failures will not only result in reputational cost for the Bank, but brings a potentially large fiscal cost indemnified by HM Treasury if they reach the stage of outright gilt sales—which is possible in about a year.

Both the European Central Bank (ECB) and the Bank of England (BOE) in recent weeks denied they ought play a role guiding markets on the future path of their policy rate.

  • First, the ECB’s President Lagarde told the press conference following their October policy meeting that it was “not for me to say” whether markets were “getting ahead of themselves” in pricing rate increases in 2022.

  • Second, following last week’s policy debacle, Governor Bailey told Bloomberg that it is not his job to steer markets on rates.

These are remarkable comments from two of the most important central bankers in the world—especially since this also represents a substantial deviation from the state-of-the-art for inflation targeters.

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