Which will make the market panic: the central bank’s transparent policy or confusion?
The Bank of England insists that silence is true wisdom’s best reply. The sterling disagrees.
My grandpa used to say fool’s haste is no speed. He was a good person but a slow emergency doctor. Central banks are rescue teams for economies, saving them with crazy monetary stimuli and helping them avoid overheating once GDP gets back to normal. It might be hard to find the balance between haste and delay. Moreover, there’s a risk of wrong interpretations.
– Keep your mouth shut, and they will think you are clever.
– Have you ever seen a fool with the mouth shut?
Bloomberg believes the Bank of England’s plan to give up comments on monetary policy is related to Andrew Bailey’s statement that forward guidance can sometimes be “hazardous” in a more uncertain world. He said Mark Carney’s tactics were inappropriate: Former Governor of the Bank of England once said the BOE would address a rate hike issue once jobless levels dropped to 7%. Mr. Bailey believes the central bank should use vague comments and make its decisions conditional on incoming data. Otherwise, investors might make wrong conclusions and thus get upset.
Andrew Bailey also stated his comments, including the shocking ones concerning the Bank of England’s determination to take high inflation in hand, were a mere “reminder of where they were,” not of what they were going to do. He means investors didn’t get him right. That sounds like an excuse. Bailey must have taken his mistake too close to heart as he continues speaking about that. It’s important that markets not feel stupid.
– Don’t make a fool out of me!
– Sorry, but the material is really good.
BoE Governor’s conclusions make me smile. You don’t need the imagination to lie. You need the imagination to make people believe you. Someone once chose wrong words, but is that worth the current fuss? Should the whole communication system between the central bank and financial markets be reframed because of that one mistake? The Bank of England is a reliable regulator, but the Fed will hardly follow its steps. It has prepared investors for the beginning of monetary policy normalization in November since June. The goal was to avoid taper hysteria, and it appears to have been reached successfully.
The BoE can’t boast the same. Avoiding making the same mistake as before the Monetary Policy Committee’s meeting in November, the Bank of England confused investors so much that the sterling fell for six days in a row. The sterling can’t stand uncertainty, but it has to. Everything went well until Bailey’s statements in October. Then, he wanted to know why.
A bet on a repo rate hike didn’t work out this time. Might it do so in December?
– If our plan works out, we will go into ecstasies.
– And of not?
– Then we will go into convulsions.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.