Bank of England’s Bailey Says Not His Job to Steer Markets on Interest Rates

(Bloomberg) -- Bank of England Governor Andrew Bailey said it wasn’t his job to guide financial markets on interest rates, hitting back against criticism that he misled investors in the weeks leading to Thursday’s policy decision.

Speaking after officials defied markets’ expectations by keeping borrowing costs unchanged on Thursday, Bailey told Bloomberg TV’s Francine Lacqua that his remarks on the need to curb inflation before the meeting were “conditional.”

“I don’t think it’s our job to steer markets day by day and week by week,” he said.

The comments will do little to ease criticism that Bailey’s decision not to push back against aggressive bets of tightening would undermine the central bank’s credibility. 

Traders had expected the BOE to raise borrowing costs from 0.1% to 0.25% on Thursday. Some of the country’s commercial banks including Barclays Plc increased, NatWest Plc and Lloyds Banking Group Plc pulled their cheapest mortgage deals before the decision, hitting households directly.

“Communications and policy feed off each other. What the Bank does is very dependent on credibility,” said Andrew Sentance, a former BOE policy maker now at Cambridge Econometrics. 

“What senior members of the Bank say can help to build confidence in the broader economy. When markets don’t have confidence in those statements, that can feed through to a lack of confidence in the economy.”

Only two of the nine rate-setters voted for an increase, with the governor himself voting to hold, despite the new forecasts showing inflation will hit 5%, more than double its target.

Traders responded by slashing rate-hike bets, and sent the pound tumbling 1.4% against the dollar. U.K. government bonds advanced, with the yield on five-year debt set for the biggest decline since the Brexit vote.

“Forward misguidance,” was how Rabobank described the BOE’s messaging after the decision, while Bob Stoutjesdik, a fund manager at Robeco Institutional Asset Management in Rotterdam said Bailey “has a serious credibility problem.”

“When look you look at how markets respond today and how they have responded to the hawkish messages you can easily conclude that the BOE have seriously lost credibility which I think is difficult to repair,” he said.

Bailey’s apparent U-turn invited comparisons with an “unreliable boyfriend”, a tag first applied to former Governor Mark Carney after he signalled rate rises and changed his mind later. “It’s not compulsory for a BOE governor to be an unreliable boyfriend,” Bailey said.

He told Bloomberg TV that his pre-meeting comments were prompted by concern that falling bond yields could lead to a rise in inflationary pressures. He said the bets following his remarks were “in the right direction, overdone.”

Jamie Rush, chief European economist at Bloomberg Economics, said it’s “absolutely Governor Bailey’s job to guide markets to a rates path that helps the Bank hit its inflation target.”

“What markets expect interest rates to be in the future affects the cost of borrowing now,” he said.

James Rossiter, head of macro strategy at TD and a former BOE economist, said it will be even harder to gauge the central bank’s future moves. 

“We knew that a November hike was a coin toss, but messaging from the BOE up to now suggested that a 2021 hike was a done deal,” he said. 

“After today’s communications, I don’t think we can take that for granted anymore.”

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