19 May 2023 - Bank of England needs to be careful about forward guidance
The Bank of England must guard against “painting itself into a corner” by providing guidance to the markets about its intentions regarding monetary policy. That was the conclusion of a conference hosted by the Federal Reserve of Atlanta earlier this week. By providing guidance to the markets in advance the Bank faces the prospect of either being accused of misleading traders and analysts should subsequent data releases mean it has to change its mind or pre-empting the votes of committee members who are entitled to have sufficient time to consider all options before casting their vote. It becomes far harder to pivot on interest rates when the market has already been appraised of the Bank’s intentions. Over the past year or so, the intentions of the Monetary Policy Committee were fairly clear, so advance guidance was acceptable, but as rates reach neutral territory or become restrictive on demand, the actions of the MPC become a little less clear. Maybe having signalled a pause in rate hikes, data on, say, inflation, output or employment may unexpectedly spike, which would leave the Bank open to criticism were it to then hike rates again. Beyond Currency Market Commentary: Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.