Divyang Shah, Senior IFR Strategist
Getting the communication right is an important part of adding credibility to forward guidance and the BoE is keen to make sure that they are on the same page.
BoE Executive Director for Markets Paul Fisher has said in evidence before the Treasury Select Committee in parliament that policy tightening in the UK is some way off in the future and “potentially years in the future”.
There is a hint here that the BoE could adopt a stronger form of forward guidance in August as Fisher says he expects the volatility to continue as US exits from its QE.
The BoE is cognisant that when it is its turn to shift gears then there will be similar volatility in the market. But Fisher underlines the point that the BoE will not have the same spillovers to international markets.
To make sure that the market does not react too violently we see Fisher make the point that rates will be hiked first before QE related gilts are sold back to the market.
Attention remains on what form of forward guidance the BoE adopts with the August meeting and inflation report likely to be important dates for an announcement. The MPC meeting is on August 8, the quarterly inflation report on August 14 and then the minutes of the August meeting on August 21.
How successful forward guidance is will depend upon the data as any signs that the recovery in the economy or housing market is gaining momentum will lead to thoughts of an early reduction of monetary stimulus.
