The deputy governor of the Bank of England has said that policymakers at the central bank should make sure they communicate in a way that members of the public and markets can clearly understand.
Ben Broadbent, who joined the Bank’s monetary policy committee in 2011 before becoming deputy governor in 2014, said that “forward guidance” given by rate-setters should be “well understood” and explain how the central bank might react to different economic outcomes.
“Expectations of future interest rates affect current demand and policymakers clearly have an interest in their behaving appropriately as economic news comes in,” he said in a speech to the National Institute of Economic and Social Research think tank.
He added: “There are various ways of doing that – speeches, simulations, perhaps even published rate paths. But whatever the medium, monetary authorities need always to think that the message, not least the point that future policy will depend on how the outlook for inflation evolves – is well understood.”
The Bank of England increased interest rates to pre-pandemic levels earlier this month in an attempt to control inflation, which is at its highest in 30 years. It was the third consecutive rate rise, leaving interest rates at 0.75 per cent.
The Bank now expects inflation to reach 8 per cent next month, up from its forecast of 7.25 per cent last month. Officials cautioned, however, that inflation in October could be several percentage points higher when households receive their gas bills.
Broadbent added that attempts to communicate the path of interest rates can sometimes be misunderstood and lead to “over-dependence” on the way in which central bankers communicate.
“My impression has been that even when central banks attempt to engage in more standard, conditional statements about future policy, they can be sometimes mistaken for firmer commitments than they really are,” he said.
“The potential cost is that forward interest rates, and monetary conditions more generally, become over-dependent on central bank communication and insufficiently sensitive to economic news.”
The central bank has an obligation to set out its view of the economic outlook and explain its policy decisions but given the unpredictable economic environment “it may also want to say more about its potential reaction to such outcomes”, he said.
The governor of the Bank, Andrew Bailey, faced criticism for fuelling speculation of a rate rise last year after the MPC surprised investors by holding rates in November. Bailey, who has led the central bank since March 2020, denied accusations that he had misled markets by saying that policymakers “will have to act” if there are risks to medium-term inflation.
The central bank’s rate-setting committee softened their language on the likelihood of future rate rises in its last meeting on March 17 after the war in Ukraine, coupled with high global energy prices, forced policymakers to increase their forecasts for inflation and revise down their expectations for growth this year. Officials said that further “modest tightening” of monetary policy “may be appropriate” in the coming months. They had previously cautioned that rate rises would be likely.
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Bank of England deputy Ben Broadbent urges colleagues to be clear about interest rates