Analysis: clear or confused? Central bank communication skills put to the test



LONDON, Dec. 6 (Reuters) – Financial markets, which have struggled this year to decipher the political signals from central bankers, face their biggest challenge yet in December when within 24 hours the Federal Reserve, ECB and Bank of England hold crucial meetings.

These come at the end of a year in which central banks have generated frequent episodes of market turmoil, the most recent examples being the BoE’s shocking ‘no change’ decision on the 5th. November, the timid October rate hike by the European Central Bank and the European Central Bank. The Reserve Bank of Australia’s failure to defend its bond yield target.

So it’s no surprise that a week or so before the last meeting crop of 2021, asset price volatility measures are rising, with currency and bond theft gauges hitting their highest in months (. MOVE), (.DBCVIX) learn more.

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Can central banks calm volatile markets?

First released on December 15, the Fed’s statement at 6:00 p.m. GMT could herald a faster decline in asset purchases and could reveal its thinking on future rate hikes.

The next day, the BoE meets, after maintaining rates in November, at odds with market prices.

Less than an hour later, the European Central Bank could announce plans for two key bond buying programs; the implications could be significant for heavily indebted states like Italy. Read more

Monetary policy messages, by their very nature, are inaccurate business. But surprisingly persistent inflation, supply chain threats to the economic recovery, and the continuing underlying threat of COVID now make the results particularly difficult to model.

“Whether it’s Madame Lagarde or Andrew Bailey or Jay Powell, the current circumstances are creating an almost perfect storm for central bank communication,” said Carl Tannenbaum, chief economist at Northern Trust who worked in the risk section of the Fed during the 2008 financial crisis.

He hopes the meetings will result in a “much more frank and in-depth discussion”, in particular on labor markets and inflation.

Investors express sympathy for central bankers whose work on the tightrope of communication has been further complicated in recent years by the enormous weight of the markets, far greater than what the previous generation of central bankers had to do face.

The value of global stocks is approaching $ 100,000 billion, almost double the levels before the pandemic; government spending follies have widened bond markets. Trading at high valuations, the potential for setbacks is huge.

And the impact of the signage resonates far beyond the markets – UK banks were so confident of a rate hike in November that they had raised mortgage costs ahead of the BoE meeting.

What central bankers need to convey is simple: they will provide the necessary short-term support and long-term price stability. But in bloated markets, where sentiment is slowing down, it’s harder than it looks.

This may encourage rethinking signaling strategies; BOE’s Bailey, for example, even suggested reverting to a no-guidance position read more.

Richard Barwell, a former BoE economist who heads macroeconomic research at BNP Paribas Asset Management, said central banks would like to preserve the policy tightening option but not commit to it.

“The challenge is to make the necessary change – and to create that option – without destabilizing the markets by convincing them that the option is certain to be exercised,” he said.

BoE signage sends UK markets into a wild ride


Barwell said any bank making a December policy tightening should explain the decision in light of the Omicron COVID variant. But the risk is then that the markets anticipate future rate hikes.

This is particularly a problem for BoE Governor Bailey, who Barwell says has a “great old Duke of York” problem, a reference to the English nursery rhyme describing futile action.

“There may be a limit to the number of times policymakers can take the market to the top of the rate hike hill and then back down,” he added.

British media quickly dubbed Bailey “Unreliable Boyfriend No. 2”, updating a nickname applied to his predecessor Mark Carney, whose political signals sometimes failed to translate into action.

ECB chief Christine Lagarde has also come under fire after her timid rejection of rate hikes slated for 2022 in late October boosted the euro and hurt bonds. But the movements reversed the following week when she forcefully refuted the rate hikes.

The Fed’s Jerome Powell seems to have got the best marks, not least for his willingness to admit he didn’t have all the answers. But even his composure has wavered recently; days after telling lawmakers that Omicron could jeopardize the economic recovery, he suggested it might be time to stop viewing inflation as transient.

The dollar, which had weakened, flew away again.

But Timothy Graf, head of State Street’s macro EMEA strategy, praised Powell for his “honesty and frankness,” drawing parallels with the frankness of former ECB chief Mario Draghi, credited with taking the zone out. euro from its 2011-2012 crisis.

“The Fed is correcting course from what was perceived earlier in the year, rightly or wrongly, to have a somewhat relaxed approach to the issue of inflation,” Graf said.

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Reporting by Dhara Ranasinghe and Sujata Rao; Editing by Toby Chopra

Our Standards: Thomson Reuters Trust Principles.



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