Bank of England governors have a recent history of not always delivering it comes to guidance. Famously, former Bank chief Mark Carney was labelled an “unreliable boyfriend” for routinely failing to deliver on his words.
Current boss Andrew Bailey seems to be eyeing up Carney’s crown after the Bank yesterday decided to hold rates at a record low 0.1 per cent despite buttering markets up for a hike.
Bailey must now explain why current policy will prevent inflation from reaching eye watering levels.
The government’s fiscal watchdog last week said inflation could top five per cent, which would force the Bank to hike rates far faster than anybody would ever want. The time to temper a fire is at the start, not when it’s already raging.
It is tough to see how yesterday’s inaction is appropriate in the context of such warnings.
Why not start the process now of gradually hiking rates to prevent that type of scenario from happening?
Failing to do so may mean the Old Lady has to raise rates by a larger amount over a shorter period of time than it is comfortable with.
Financial markets do not react well to such sharp changes in policy.
It seems counterintuitive to hold off from hiking rates when markets had already done most of the heavy lifting for the Bank.
Due to Bailey, and other members of the monetary policy committee, projecting more hawkish rhetoric, markets have moved quickly over the last month to price in higher rates.
In the process, they have set the wheels of tighter financing conditions in motion. Regardless of what the Bank did yesterday, the ship had the wind in its sails.
The risk is now that markets will begin to look with scepticism on pronouncements at the top of the Bank. A return to Carney-era eyebrow-raising is another unhelpful development with the recovery already rocking.