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Keeping the markets guessing is one thing, and deluding them is another matter entirely. Perhaps in an effort to do the former, the Bank of England directly ended up doing the latter.
Since the minutes of the September meeting indicated that the central bank may be ready to raise interest rates before quantitative easing expires in December, it was fair game for rate traders to prepare for a bank rate hike sooner rather than later.
As if to add fuel to the fire, spokesperson after Bank of England spokesperson pointed out how dangerous it is to let inflation expectations go unchecked. Governor Andrew Bailey himself noted that it would “obviously be very detrimental” to allow inflation to become “permanently embedded”. You found the idea. But in time to move forward with the talk, policymakers perplexingly failed to follow through, voting against what their statements would have suggested.
It was not as if the markets had prepared for a rate hike overnight. The tampons were sold out for the full three months through October, and the increase in yield was a ferocity we haven’t seen in years. The Bank of England has never stopped any of those market rates, despite many policy makers making comments left, right and center, day in and day out.
If the Bank of England had managed its communications better, the two-year gold yield would not have fallen by a whopping 21 basis points on Thursday. The pound was not going to fall further this year. The most damaging part of the BoE bounce will be the way the markets are constantly behaving. What should a gold bond trader do the next time a policymaker expresses serious concern about inflation? Indeed, if inflation isn’t worrisome enough to justify a rate hike, why bother cage everyone else with comments that suggest otherwise?
Former Federal Reserve Chairman Alan Greenspan has perfected the art of confusing the markets with his crypto comments, without ever misleading them. Markets, unfortunately, will not say the same about the Bank of England. If the markets had the power to assess the BoE on its call strategy, they would give it the lowest score possible.
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