UK attacks central banks, markets collapse



Bank of England Governor Andrew Bailey addresses the Monetary Policy Report press conference in London, Britain, November 4, 2021. Justin Tallis / Pool via REUTERS

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LONDON, Nov. 4 (Reuters Breakingviews) – Bank of England chief Andrew Bailey has joined the standoff between central bankers and financial markets. Like Federal Reserve Chairman Jerome Powell and European Central Bank boss Christine Lagarde, the Briton is trying to persuade investors that interest rates will not rise as aggressively as market prices imply. Its may be the hardest sale.

The British central bank got the ball rolling on Thursday by announcing that seven of its nine members Monetary Policy Committee voted to leave interest rates unchanged. As investors viewed a rate hike as a near certainty, UK and UK government bond yields fell sharply. But the size of the majority supporting the status quo was not the only shock. Bailey also offered unspoken advice in the form of the committee’s inflation forecast. These showed that the UK central bank would not exceed its 2% inflation target at the end of 2024 if its policy rate followed the path suggested by market prices.

While this was a subtle way of telling investors they were getting ahead, it still had some impact. Market prices now imply a 60% chance of a UK rate hike in December. Expectations for the rate hike have also been lowered. But money market prices still see Britain’s key rate drop from 0.1% to 1% by December 2022. That would be enough to produce the inflation understatement Bailey reported.

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He might, however, have a harder time containing his expectations than either Powell or Lagarde. The Fed’s dual tenure means that Powell aims to promote full employment as well as target inflation. This gives the American a stronger case for pushing back expectations of rate hikes than Bailey, who has an old-fashioned target focused solely on consumer prices. Meanwhile, the ECB is facing a lower inflation overshoot than either the Fed or the BoE. He also has better reason to believe that the price pressures will subside read more.

Another factor complicates Bailey’s communication challenge. The BoE will most likely raise rates before the Fed, and well before the ECB. Once investors see one rise, they usually start looking for the next one. Preaching patience can be tricky.

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– The Bank of England said on November 4 that its Monetary Policy Committee voted by a 7-2 majority to leave the key rate unchanged at 0.1%. A 6-3 majority voted in favor of continuing the bank’s UK government bond purchase program.

– The central bank said its staff now expect consumer price inflation to peak at around 5% in April 2022, significantly higher than its expectations in August. However, inflation is expected to fall back in the second half of next year, as supply disruptions ease, global demand rebalances and energy prices come down.

– Yields on British pound and UK government bonds have fallen sharply. Markets had assessed a rate hike as near certainty after Governor Andrew Bailey spoke in October about the need to contain inflation expectations. The British pound slipped more than 1% to $ 1.3533 as the yield on two-year gilts fell 14 basis points to 0.56%.

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Editing by Ed Cropley and Oliver Taslic

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