Market rate bets can mislead: BoE’s Broadbent

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