BoE’s Inflation Report: what would forward guidance mean?
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For most analysts, the highlight of today’s release of the Bank of England’s Inflation Report will be provision of the result of the Bank’s assessment of forward guidance.
We expect calendar and threshold forward guidance to be announced.
This would likely involve a statement that the majority of MPC members do not expect rates to rise until a given date, as well as a threshold, such as the unemployment rate, before which rates will not be raised.
Of course this guidance is also highly likely to be conditional on underlying inflationary pressures remaining in line with the bank’s mandate. We anticipate that the threshold chosen is likely to be related either to the unemployment rate or nominal GDP growth.
If we do get forward guidance of this sort, we would expect gilts to rally versus Bunds, bull-steepening of the curve and tighter swap spreads, with markets likely to interpret the introduction of forward guidance as a dovish development, especially in light of the recent stronger-than-expected activity data.
On the other hand, if the Bank’s Monetary Policy Committee does not introduce a strong form of guidance, we would expect sharp appreciation of the pound to be the knee jerk reaction, together with a sell-off in fixed income, led by the front end of the curve.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
