The last two speeches from Mark Carney and Gertjan Vlieghe makes me wonder if the Bank of England (BoE) are preparing us for a change to come at the August Monetary Policy Committee (MPC) meeting.
BoE economists factor-in both government policy and market-based interest rate projections into their models, and then create projections of GDP and inflation. However, this approach raises a number of issues that the Bank is clearly wrestling with.
In his “Sea-Change” speech on the 2nd July, Carney stated “As the perceived probability of a “No-deal” Brexit has picked up, the levels of Bank Rate, Sterling and other UK asset prices in our projections have therefore become increasingly inconsistent with the smooth Brexit assumption in the MPC’s projection”. He then went on to say “The MPC will explore how to best illustrate these sensitivities as we update our projections for the August Inflation Report.”
On the 12th July fellow MPC member Gertjan Vlieghe made a speech on communication improvements. In this speech he said communication is currently:
- Too complex & inefficient – the BoE have to take a market path of interest rates and reverse engineer policy depending on the inflation outlook coming out of the model.
- Too inconsistent – we do not get a coherent message on the outlook.
Importantly, he stated that not only would he like to see the preferred path of interest rates published, but also made it clear that under different scenarios “We might still show an alternative forecast based on some other path, in order to show what difference it would make or to discuss salient alternative scenarios, as this would allow outside observers to better understand the MPC’s policy preferences and views of the transmission mechanism”.
I expect no official change in communication at the August meeting as central banks are inherently cautious, even if there was universal agreement on Vlieghe’s recommendations. However, I think it is entirely feasible that in the Quarterly Inflation Report on the 1st August we get more information on the policy reaction to different Brexit outcomes. We might even get a policy path based on a Brexit deal, No-deal or extension period.
Be prepared for more fan charts!