Market pricing for first rise in Bank Rate may mislead, BoE's Broadbent says

Market pricing around the timing of a Bank of England interest rate rise could be misleading if investors read too much into forecasts, the Deputy Governor of the Bank of England cautioned on Wednesday.

Speaking at an event in London, Broadbent indicated that the interest rate curve – the cost to the Treasury of borrowing money in the markets at different time intervals – when the last quarterly Inflation Report was published “even if only at the margin […] was thought likely to over-achieve” in terms of bringing prices back up to target.

Broadbent’s said there were multiple paths the Monetary Policy Committee (MPC) could choose to follow to arrive at any given inflation outcome two years forward – and not just that implied by financial markets.

While the inflation target was the BoE’s primary focus, it was not its only objective. Sometimes, it would trade them off against each other, as it did in mid-2011, he added.

That meant that the time horizon for reaching the inflation target could also vary.

However, the deputy governor admitted that investors’ approach to inferring when the MPC might decide to move was not “unreasonable,” but added “you shouldn’t push them too far”.

Broadbent said other risks needed to be taken into account, such as the host of assumptions underlying the BoE’s quarterly inflation forecasts and the fact that market interest rates can be impacted by factors such as investor’s fears or what economists call ‘risk appetite’ or ‘risk-aversion’.

Do your own homework

The central banker also pointed out it had become much more difficult to uncover “simple reduced form relationships” to help predict moves by the BoE since the financial crisis.

He emphasised that the Bank’s forecasts are not promises but only a rough guide of “the nature and distribution of economic risks over the future”.

“I will therefore conclude with something of an apology. For those in the audience wanting me to give a direct and unequivocal promise as to when Bank Rate will change, you will, I’m afraid, be disappointed. I can’t."

"If there is any value in listening to people like me, it is to help you with what is the best way to try and predict future interest rates - to forecast the economy yourselves (which is probably more interesting)."