Bank of England must follow words with actions

02 Oct 2013

‘Sticks and stones may break my bones, but words will never hurt me.’ I was reminded of this saying when reading a recent article about the use of communication and, namely, words by the central banks of the world.

The gist of the article was that in today's world economy there can be as much credence given to words as much as deeds and therefore central banks can increasingly shape, for example, their national economies through a well-timed and articulated speech, or regular communication, without having to initiate and follow through with actual policy.

The argument goes that if members of an economy perceive there to be a change of focus and the likelihood of, for example, future movements in interest rates then they will change their behaviour without there being any kind of interventionist policy.

Perceptive members of the central banks' executive teams have realised that by simply covering an issue, be it house price rises or inflation levels, the markets react to those utterances regardless of the lack of action.

We can even go so far as to see how the introduction of regular announcements over the cycle of a month or quarter produces a shift in the market based on the anticipation of what those communications will say. In essence communication from central banks is a huge influencer within not just the UK but the whole of the world economy.

In the UK speeches are increasingly being used by the MPC in particular not just to give an insight into how the committee makes its decisions but also to give a view into the attitudes and perceptions of individual members.

It is through the public utterances of these people that the market is able to determine its stance on rate setting and it is why we will often hear about a specific member being either a hawk or a dove.

Add into this communications such as the minutes of each MPC meeting where we can see just how an individual has voted and this gives us a greater understanding about where the committee might be heading.

Interestingly, part of the reasons one suspects the government chose to appoint Mark Carney as the Bank of England's governor was because he is widely held to be a strong orator and communicator.

However, one suspects that reputation may have taken a slight dent given the mixed response to his decision to offer ‘forward guidance' with regard to interest rate movements.

Certainly, while he would have expected his words to usher in a further dollop of confidence for those in the markets, the economic data that has followed the announcement has appeared to point in a different direction.

Indeed, forward guidance is not being viewed as the line in the sand that Carney may well have hoped. It would seem that sometimes you really do need action rather than words to change the mindset of a significant number of market stakeholders.

Bob Hunt

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