A sign of changing times for central bank communication today with the Bank of England (BoE) for the first time including the minutes - and thus voting breakdown – from its latest Monetary Policy Committee (MPC) meeting alongside the month’s policy update (no change, no surprise). This puts an end to the traditional fortnightly lag for the MPC minutes which, ever since we were told rates would soon rise, has seen GBP volatility rise in the wake of the monthly policy update on speculation about the vote split and what it could mean for the timing of the bank’s first post-crisis rate hike from historical 0.5% lows. It also hindered how far the Governor could immediately comment on individual views. With the bank’s Quarterly Inflation Report (QIR) and accompanying press conference also taking place today, it has only gone to make for a data deluge dubbed ‘Super Thursday.’ The upshot is GBP/USD pulling back to 24-July lows on news that UK rates are likely to rise by 0.25% in Q2 2016, hindered by low inflation from commodity price declines and thus very likely after the US Federal Reserve (Fed) makes its own hike (September? December?), much as we have expected all along. After you, Janet.
Banking Shake up as an Appeal to the People
The BoE communication shake-up is all part of Governor Mark Carney’s efforts to enhance transparency and make the oft-criticised UK central bank more accountable to the British people. It is also to avoid drip-feeding information and allow markets to react to all available facts as soon as available rather than swing around unnecessarily. On the one hand, it will mean, as today, a marathon quarterly effort in analysis of the QIR, MPC policy update, MPC Minutes and Press conference. On the other hand, it will mean being able to deal with all monthly policy update information in one fell swoop. Some feel the importance of the keenly-watched QIR may become drowned out by the vote breakdown within the MPC Minutes. Others believe that in this age of information overload, we will simply learn to deal with it.
With the US financial turned Eurozone sovereign debt turned global financial crisis seeing major central banks cut interest rates to historical lows, and resort to extraordinary policy tools such as quantitative easing (QE), monetary policy and indeed macro data are treated very differently to how they were pre-crisis. Every data point is now viewed as a contributor to seeing rates stay put or lift-off from lows. Only the other day I recall, as a junior equity analyst in the early 2000s, when central bank policy moves attracted far less attention, merely serving to regulate inflation around a 2% target that matched long term GDP growth assumptions. Macro-data was thus less important as we weren’t concerned about the knock-on for rate moves. To put it all in context, risk free rates in models were based on 10yr government bonds yielding a whopping 4%! With inflation missing in action post-crisis, global growth uneven to say the least, and "risk-free" now a thing of the past after multiple Eurozone bailouts, the financial world is a very different place.
But are current changes not a welcome signal? If new UK legislation is passed, and the number of BoE MPC policy meetings reduced to eight from 12 per year from 2016, similar to the European Central Bank’s (ECB) decision back in January to reduce meetings to every six weeks, rather than monthly (and end more than a decade of silence by joining global peers in publishing meeting minutes; although still no vote breakdown), does this not imply we are finally moving back towards more traditional monetary policy, requiring less meetings for less fire-fighting? A return to the use of rates for inflation regulation by the big three BoE, ECB and Fed (the latter has dual mandate of inflation + full employment)? While many are fearful of those first rate rises after cheap money for so long, they will be small, slow and we are unlikely to see a return to pre-crisis rate averages for a long time, maybe never. I think we’re better focusing on the changes in communication as a sign that we’re finally exiting crisis-mode. After eight years of policy being used to avoid economic meltdown, it is sure to become far less exciting but it’s a welcome change, finally, to be able to go forward to the past.
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