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Does it matter if the Bank of England’s (BOE) Monetary Policy Committee (MPC) decides to hike its rate this Thursday? Or if it instead waits for more data on the labor market and raise instead at the December 16 meeting? Not so much.
But it really does matter what the MPC does after that. It won’t do anything for the central bank’s reputation if it dithers and delays. So the BOE had better get its communication strategy right for once or else it will allow inflationary expectations to rip.
The central bank has kept the stimulus hosepipe on too long. In order to avoid a massive policy error, it has to admit it’s been asleep at the wheel and raise rates. Unfortunately, correcting mishaps is never that simple and by reacting too sharply it risks crushing the recovery and compounding its missteps. It’s a situation all of the BOE’s own making.
Governor Andrew Bailey has marched us up this hill with repeated signals to expect more than one rise in the bank rate in the near term. This quarterly MPC meeting should get on with tweaking the current 0.1% to 0.25% — and then give us an idea of when it will be raised more substantively. And there’s an even more important message to impart: How the BOE will quell the inflationary beast for the foreseeable future.
Vague platitudes on waiting for more data will not be accepted. We deserve clarity after seeing the central bank effectively tear up its long-held forward guidance of near-zero interest rates on Sepember 23. This must come across at the press conference, which also needs to be of a substantially higher quality than any so far in Bailey’s tenure.
But make no mistake, as a rate hike is fully priced in — and the bank has not pushed back against that — a failure to act will weigh Bailey down with a reputation for inconsistency.
One question is the handling of the remaining 20 billion pounds ($28 billion) of the BOE’s 150 billion-pound pandemic stimulus program. It looks ridiculous to be ploughing on with quantitative easing while simultaneously raising rates. The MPC might think this a trifling matter: After all, there’s just six weeks before the program expires. Sadly not so inconsequential for the gilt market, which is seeing what little net supply there is left vanish for the rest of the financial year to April.
—Bloomberg