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It’s not officially in their mandates, but central bankers don’t like to surprise the market.
The idea is that predictability will make their policy more effective, to the ultimate end users of interest rates: consumers and businesses. It’s why the Federal Reserve now has press conferences, dot plots and economic projections, compared to decades earlier when it didn’t even announce its interest-rate decisions.
On that score, Federal Reserve Chair Jerome Powell delivered with his latest monetary policy decision in a way his international counterparts did not. Bond yields
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moved little as the Fed announced a taper and Powell explained the rationale for its actions.
Bank of England Gov. Andrew Bailey on Thursday was being compared to his predecessor, Mark Carney, who earned the “unreliable boyfriend” reputation for telling markets he would do something and not following through. Bailey had led financial markets to assume an interest-rate hike was coming so much that a 100% probability of a hike was priced in to key futures contracts.
Bond yields
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and the pound
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predictably fell when the Bank of England decided to keep interest rates steady at a record low of 0.1%.
“Former governor, Mark Carney, was labelled the ‘unreliable boyfriend’ over his confusing communication, and there is a risk that the new governor inherits this moniker following his public statements ahead of today’s announcement,” said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors. “After taking time to seemingly warn markets about potential lift off, it may be particularly perplexing for many that the Bank then chose to push against markets that had priced in a steeper path for interest rates.”
Now, markets aren’t sure even a December hike is coming. “While our base case remains for a December hike, the decision could go either way with the first hike possibly delayed until February,” said Kallum Pickering, senior economist at Berenberg, who correctly had forecast the Bank of England would not increase rates in November.
Financial markets also were caught out by the Reserve Bank of Australia, which first opted not to defend a yield curve control policy on its 3-year bond
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and then insisted it wouldn’t hike interest rates until 2024.
Christine Lagarde, president of the European Central Bank, seemingly sent herself out to correct her own mistake in not, at her post-decision press conference, fighting hard against market expectations for rising interest rates. Less than a week later, she gave a speech calling an interest-rate hike in 2022 as “very unlikely” — a phrase she noticeably did not employ at the end of October.
At the Fed, there’s no need for a post-decision do-over. “Fed chair Powell and his colleagues succeeded in threading the needle, near-term at least, at the high-stakes November FOMC meeting,” said Krishna Guha, vice chairman of Evercore ISI.
