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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chief economist and head of investment strategy at Vanguard Europe
In early 2023, the Bank of England held a press conference on its latest deliberations on monetary policy and interest rates. It had just raised rates by half a percentage point despite its new projections that inflation would fall well below target within a year.
It was up to BoE governor Andrew Bailey to explain why. As Financial Times reporting at the time summed it up, “the results were rather messy”. The communication left market participants with differing interpretations about the outlook for the economy and rates. Some took the message as the bank signaling an end to rises, while others were not so sure.
The uncertainty underlined the difficulty in messaging — particularly at BoE press conferences — and was a reminder of the virtue of clarity in communication. BoE officials often say they cannot reveal much about future policy, leaving markets to “read between the lines” of sometimes ambiguous statements and speeches. The technical jargon of some of the speeches of officials can bewilder even specialists.
Yet a clear sense of the future path of policy is useful for many. For households, that path influences the interest rates on mortgages, credit cards, and savings; it is important for businesses in their financial planning; and critical for investors holding a diversified portfolio of equity and bonds.
It also has market sensitivity as Vanguard research on how bond yields and equity prices change after announcements from the rate-setting Monetary Policy Committee meetings and press conferences shows. The changes are small (around 0.02 to 0.03 percentage points) but are seen across the yield curve and take place minutes after the communication of MPC decisions. And markets tend to move more around press conferences.
Some progress has been made. On November 6, the BoE revealed welcome changes after its latest MPC decision following recommendations by former US Federal Reserve chair Ben Bernanke. The minutes of policy meetings now dedicate a paragraph for each MPC member to explain their view. The Monetary Policy Report has been revamped to include a range of future policy paths. But the bank made clear that these are inputs into the policy deliberations and not MPC policy projections.
The BoE could go further by publishing an MPC policy projection, including a view on where rates will settle and making it available in a visual format that is easy to digest.
The reluctance of the BoE to share its view of likely future policy is understandable. The task of forecasting is a complex one and any deviation between prediction versus reality could impinge on credibility.
Undoubtedly, as news about the economy evolves, it is inevitable that what seems like the right direction of policy today might change a few months later. However, the BoE could mitigate this by clarifying that a policy projection does not amount to a binding commitment. And it could illustrate the uncertainties by showing the level of its confidence in a range for future rates.
To appropriately set monetary policy, the BoE must take a view on the supply side of the economy, and the neutral rate of interest (or R-star) when monetary policy is not too tight or too loose. With material changes to tariff and immigration policies, the impact of artificial intelligence, rising fiscal risks and ageing populations, we are witnessing big shocks to supply and demand. This makes economic forecasts harder.
Markets, businesses, and investors could benefit from the wisdom of the BoE, relying on it to help simplify the complex narrative and provide estimates of the trend rate of growth and R*. The outside world appreciates that these concepts are highly uncertain.
Having decided what to communicate, changes are needed on how to do that. One area is press conferences, where a refresh of the format and increased frequency could be helpful. To convey a clear message, there could be one speaker, one view (the committee view), and no contradictions. Having a press conference after every policy decision meeting is now best practice by major central banks except the UK.
The BoE also could have a greater impact if it published its inflation, growth, and policy projections in an easy-to-digest visual. The dot plot of economic projections of US Fed officials does well in this regard. The dot plot may not be the solution for the BoE but markets would value an MPC policy projection with scenarios and ranges so that readers can quickly spot changes to policy thinking. Publishing one would improve monetary policy transparency, enhance bond market efficiency, and reduce the guesswork for businesses and investors.