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Traders Should be More Independent says Broadbent

In: Finance, Forex

“Even when central banks attempt to engage in more standard, conditional statements about future policy, they can be sometimes mistaken for firmer commitments than they really are, the potential cost is that forward interest rates, and monetary conditions more generally, become over-dependent on central bank communication and insufficiently sensitive to economic news.” Said Bank of England Deputy Governor Ben Broadbent.

When assessing the future path for interest rates, financial markets have become over reliant on central bank guidance and should be more tuned in to short-term data.

Broadbent’s comments, were made in light of a number of high-profile clashes between markets and the BOE over the past decade, with investors complaining officials failed to follow through on their guidance.  

Broadbent’s comments also come at a time when the two seem to be heading for another collision, with market pricing for a series of interest-rate hikes to 2% this year contrasting with BOE hints that forecasts for weaker growth and a sharp drop in inflation meaning their hiking cycle may need to be slower.

The fastest inflation in three decades has already prompted the quickest tightening since 1997, but he didn’t offer any thoughts on the current monetary policy situation.

Governor Broadbent referenced a quote from the boxer Mike Tyson: “everyone has a plan until they get punched in the mouth.” To remind people that central banks cannot provide a commitment about the path of future policy.

 “If people come to rely too much on explicit steers from the central bank, forward interest rates and other asset, prices may become insufficiently sensitive to economic events,” he said.

“And if in turn the central bank acquiesces to the desire for more definitive statements about the future path of interest rates, and feels the need to signal policy changes well in advance, this could compromise its ability to respond to surprises that occur in the meantime.”

Colleagues of Broadbent were prompted to hint they would give less guidance in future, with Governor Andrew Bailey and Chief Economist Huw Pill saying it was not the role of the central bank to hold the hand of investors.

Broadbent drew a distinction between “committed” guidance, used to signal a specific date or data trigger for policy moves, and “contingent” guidance. He also said it will still be important for the central bank to express its views and explain its reaction to certain events.

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