England and the US differ in communication of monetary policy

The Bank of England’s dispute with the financial markets over how to communicate monetary policy is not the first. Until investors recognize how the UK central bank’s approach differs from the US Federal Reserve’s guidance, more confrontations are likely.

If there is one lesson to be learned from the reaction against the Bank of England’s surprise decision this month to leave interest rates unchanged, it is that language can be as powerful as policy.

No changes hit after central bank governor Andrew Bailey warned in October that authorities “they would have to act”To curb inflation.

Investors had discounted the first increase in borrowing costs since the start of the pandemic, causing them to rise in financial markets. Banks responded by withdrawing cheap mortgage offers. The words of Bailey they had the effect of a rate increase of almost 0.15%.

The turbulence in the UK markets contrasts with the system that Fed It has embraced since 2013, when misplaced words sparked a widespread sell-off of US Treasury securities and emerging market assets.

On Monday, Bailey blamed British market participants for the misunderstanding. He said investors transformed their “conditional” statements on the direction of interest rates at a G30 conference on October 17 into “unconditional views of the world”. Hours after the rate decision on November 4, the governor told Bloomberg TV that it was not his job.direct markets”.

The distinction it makes Bailey It’s important because investors and many economists already started pricing in a rate hike on December 16 despite this month’s surprise.

The Fed it has targeted more detailed targeting and stable markets since the turmoil eight years ago. In that episode, the then president of the FedBen Bernanke told Congress that asset purchases would slow down at a future date. The market reacted strongly.

Between May and December 2013, the 10-year yield increased from 2% to 3%, prompting investors of dollar assets to withdraw money from developing countries back home. The incident destabilized global markets.

Philip Shaw, economist for the United Kingdom At Investec, he says that the Fed’s careful guidance, in contrast to what some call constructive ambiguity from the Bank of England, was not “philosophical but practical”, Having learned the lesson eight years ago.

“It seemed like they were mishandling things [en ese entonces]. So the Fed takes every opportunity to … be granular on guidance to prevent markets from being shaken”.