SIMON LAMBERT: Don't expect to be told when rates will rise - bad news can always derail monetary plans
The Bank of England would have us believe that reports of forward guidance’s death are greatly exaggerated and the concept has merely evolved.
You could be forgiven for thinking, however, that Bank deputy governor Ben Broadbent was trying to finish off forward guidance once and for all this week.
At a Reuters event he pointed out that people shouldn’t put too much faith in the money market views of when rates would rise, despite this expected path featuring fairly heavily in the Bank’s own Inflation Reports.
Those Inflation Reports are in turn the chief piece of signposting that economists and rate-watchers look at for an indication on when rates will rise – and how swiftly.
Don't trust the markets: The chart above uses data from the Bank of England Inflation report to show the money markets' most likely path for Bank Rate based on overnight index swaps. While the Bank uses this heavily in its Inflation Report, the deputy governor has said it shouldn't be relied on
It’s easy to read this as just another chapter in the forward guidance muddle. But Mr Broadbent makes a very good point: we must not rely too heavily on markets’ or economists’ forecasts.
These have been consistently wrong now for a long-time. At times, markets and economists have forecast rate rises moving closer and steeper, at others they have seen them drifting away.
We have repeatedly made the point in our When will interest rates rise? round-up that while you can read these forecasts as a rough guide to rate-setters’ thinking, they are constantly shifting and not a spot on prediction.
One of the things we use to highlight this is how for some time the money market curve suggested rates would be cut below 0.5 per cent – even as the Bank indicated it would be highly unlikely to do this.
Another is charts like that above, created with data from the Bank's Inflation Report, which shows how the financial markets' expectations for rates can shift dramatically in just three months.
This time round, the China-led stockmarket wobbles in late summer, combined with fears over global growth, a burst of 'mild' deflation and the US Fed not raising rates in September pushed that curve back.
If the Fed makes a move on interest rates next month, I would expect the curve to be pulled towards us.
It's worth remembering though that the curve reflects bets being made on the financial markets on the path of interest rates - and markets typically tend to overshoot
The real outlook for rates probably lies somewhere in the middle of the path that is mapped out.
But things change, the Bank's ratesetters are being served up a confusing mix of data and the bar seems to be currently set pretty low for things considered bad enough to stall a rate rise.
My view has long been that while I think interest rates should have very gently started to shift up by now, I expected the Bank to stick to lower for longer.
But any idea that money markets, economists, the Bank of England (or even journalists) can tell us exactly when rates will rise is misguided.
What I would look out for is the rate curve moving consistently closer, as more MPC members start voting for a rise, GDP growth is robust, and wages are rising.
The question is whether we can get to the point where a rate rise is seriously on the table before something bad happens to derail it for years again?
Laid out: The Bank of England's November Inflation Report contained this table on rate expectations
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