Mar­ket rate bets can mis­lead: BoE’s Broad­bent

Kuwait Times - - BUSINESS -

LON­DON: A se­nior Bank of Eng­land (BoE) pol­i­cy­maker said yes­ter­day that pric­ing in fi­nan­cial mar­kets for when Bri­tain’s record-low in­ter­est rates are likely to rise could be mis­lead­ing and risked chang­ing quickly. Deputy Gov­er­nor Ben Broad­bent, in the text of a speech given at a Reuters news­maker event, also cau­tioned in­vestors not to “fo­cus ob­ses­sively” on the BoE’s in­fla­tion fore­casts and in­stead to con­cen­trate on the broader fac­tors driv­ing growth. The Bank cut in­ter­est rates to 0.5 per­cent in 2009, in the depths of the fi­nan­cial cri­sis, and has kept them there ever since.

In­vestors have been re­peat­edly wrong­footed since the fi­nan­cial cri­sis over when the BoE will start to raise rates, with guidance over­taken by sur­prise eco­nomic news such as the plunge in global oil prices. Al­though wages have be­gun to rise more strongly re­cently, in­fla­tion re­mains be­low zero and mar­kets are bet­ting that the Bank will only raise rates in early 2017. In his speech, Broad­bent noted that yield curves in mar­kets were cur­rently very flat, leav­ing the tim­ing that they im­ply for a first rate hike vul­ner­a­ble to sud­den moves.

“Even rel­a­tively mod­er­ate changes in for­ward rates, prompted by un­ex­cep­tional news about the econ­omy, can re­sult in big shifts in the date at which the yield curve first reaches some par­tic­u­lar level,” he said. “But that doesn’t mean the (BoE) Mon­e­tary Pol­icy Com­mit­tee’s views about fu­ture pol­icy, over the medium term, have moved so dra­mat­i­cally. If noth­ing else, this demon­strates the prob­lem with fo­cus­ing too ob­ses­sively on that par­tic­u­lar date.” Broad­bent said mar­kets ap­peared to push expectations for the tim­ing of rate hikes much fur­ther back than econ­o­mists at times of risk aver­sion among in­vestors, such as now as con­cerns mount about the global econ­omy.

Yield curves fac­tored in risks-such as the de­sire of in­vestors to in­sure against an un­ex­pected global slump-that did not di­rectly feed into when the BoE was most likely to start to raise rates. A Reuters poll, pub­lished in late Oc­to­ber, found most econ­o­mists be­lieved the BoE was likely to start rais­ing Bank Rate in the sec­ond quar­ter of 2016. But mar­kets are only fully pric­ing in a 25 ba­sis­point in­crease in early 2017. Those bets grew af­ter the BoE’s lat­est eco­nomic fore­casts, pub­lished ear­lier this month and suggest­ing in­fla­tion would barely rise above its 2 per­cent tar­get in two years’ time even if rates stayed un­changed into 2017.

Broad­bent said the Bank’s in­fla­tion fore­casts were a far from per­fect indi­ca­tor of what was likely to hap­pen with bor­row­ing costs. “Our un­der­stand­ing of the econ­omy evolves over time... Em­pir­i­cally, the be­hav­ior of the econ­omy mat­ters more for in­ter­est rates than prior fore­casts,” he said. Busi­ness sur­veys mea­sur­ing pri­vate-sec­tor growth had in the past of­fered a bet­ter guide to how the Bank’s rate-setters would vote over the fol­low­ing three months than look­ing at how far the BoE forecast in­fla­tion would miss its tar­get, he said. Broad­bent, who has voted along with all but one of his fel­low MPC mem­bers to keep rates on hold, said he would dis­ap­point mem­bers of his au­di­ence hop­ing for a prom­ise on when the Bank would move. — Reuters

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