(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

LONDON - Bank of England chief Andrew Bailey has joined the tussle between central bankers and financial markets. Like Federal Reserve Chair Jerome Powell and European Central Bank boss Christine Lagarde, the Briton is trying to persuade investors that interest rates won’t rise as aggressively as market prices imply. His may be the toughest sell.

The UK central bank got the ball rolling on Thursday by announcing that seven of its nine-member Monetary Policy Committee had voted to leave interest rates unchanged. Since investors had viewed a rate rise as a near-certainty, sterling and UK government bond yields fell sharply. But the size of the majority backing the status quo wasn’t the only shock. Bailey also offered tacit guidance in the form of the committee’s inflation forecasts. These showed that the UK central bank would undershoot its 2% inflation target in late 2024 if its policy interest rate followed the path implied by market prices.

While that was a subtle way of telling investors they were getting ahead of themselves, it still had some impact. Market prices now imply a 60% chance of a UK rate hike in December. Expectations of how high rates will go have also been scaled back. But money-market prices still see Britain’s policy rate rising from 0.1% to 1% by December 2022. That would be enough to produce the inflation undershoot that Bailey flagged.

He may, however, have a harder time reining in expectations than Powell or Lagarde. The Fed’s dual mandate means Powell aims to promote full employment as well as target inflation. That gives the American a stronger case to push back against rate-rise expectations than Bailey, who has an old-school target focused only on consumer prices. Meanwhile, the ECB is confronted with a smaller inflation overshoot than either the Fed or the BoE. It also has better grounds to believe price pressures will fade.

One other 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 hike, they typically start looking for the next one. Preaching patience may prove tricky.

 

CONTEXT NEWS

- The Bank of England said on Nov. 4 that its Monetary Policy Committee had voted by a majority of 7-2 to leave the key policy interest rate unchanged at 0.1%. A 6-3 majority voted to continue with the bank’s programme of UK government bond purchases.

- The central bank said its staff now expected consumer price inflation to peak at around 5% in April 2022, materially higher than its expectations in August. However, inflation was projected to fall back in the second half of next year as supply disruptions eased, global demand rebalanced and energy prices eased.

- Sterling and UK government bond yields fell sharply. Markets had priced a rate hike as a near-certainty after Governor Andrew Bailey spoke in October of the need to contain inflation expectations. Sterling slid more than 1% to $1.3533 while the yield on two-year gilts fell 14 basis points to 0.56%.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Ed Cropley and Oliver Taslic) ((For previous columns by the author, Reuters customers can click on PATTANAIK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | swaha.pattanaik@thomsonreuters.com; Reuters Messaging: swaha.pattanaik.thomsonreuters.com@reuters.net))