The changes prepared at the Bank of England will change the way markets react to the institution's data, as Governor Carney's clearer communication strategy will now send an avalanche of data tumbling onto the markets on the same day.
What has been communicated in pieces until now will be delivered at once starting in August, as one of the world's oldest central bank shakes up its communication strategy.
The reason? With years of ultra-easy monetary accommodation coming to an end in the foreseeable future, the Bank needs to provide the markets with much clearer and comprehensive messages to eliminate speculations and rumours. Providing guidance to markets, communicating clearly the goals as well as means, this is the take Governor Mark Carney brought with him from Canada, when he took over the helm at the The Old Lady.
Since this coming August, monetary policy decisions and the all the subsequent documents and meeting logs will be communicated at once. The bank rate, the MPC minutes, and even the quarterly macroeconomic forecast presented in the Inflation Report will be delivered to the market at the same time. Market participants will then have it all at once, with the first of such super briefings provisionally set for August 6.
When speculation shakes up markets
On February 18 this year, cable shot up after the Bank of England (BoE) released its Monetary Policy Committee (MPC) minutes showing that "for one member, the next change in the stance of monetary policy was roughly as likely to be a loosening as a tightening." The reaction to the MPC minutes was swift, but rather mild as sterling rose some 70 pips against the dollar in a few seconds, although the rise was also partly attributed to the UK labour market data published on that same day.
Market participants began to speculate about the identity of the MPC member in question, and the significance of his or her differing view from the rest of the committee.
It then took more than a month for the BoE watchers to find out it was the central bank's chief economist Andrew Haldane, who in his March speech at the BizClub lunch in England's Rutland revealed it was him whose stance on the monetary policy decision at that time was that "the chances of a rate rise or cut are broadly evenly balanced."
Similar speculations arose at the time when both Martin Weale and Ian McCafferty dropped their rate-hike vote in January this year after they were voting in favor of the rate increase between August and December last year. To add to the uncertainty, the markets have been nervously waiting on every first Thursday of the month for a more detailed policy statement to come alongside the announcement - the statement that the BoE issued only once since July 2013, one month after Carney's arrival at Threadneedle street.
The longer the BoE maintains ultra accommodative monetary policy, the more speculation and nervousness is present within the markets.
Enhanced communication efforts
Under current legislation, the markets need to wait for around two weeks to read the MPC minutes to find out the voting pattern and the sentiments among the MPC members – a period that generates speculation and intensifies market noise.
The efforts to eliminate detrimental information noise will continue to materialize under the new legislation that comes into force this coming August, when the BoE introduces new operational and communication strategy procedures. The fundamental of this change will be that the BoE will publish the rate and the QE volume announcement, the MPC minutes, and, once in three months also the Inflation Report forecasts, on the very same day, at the same hour and in one very hot minute.
Based on the 'Warsh Review'recommendation, the BoE also agreed back in December last year to scale down the number of its regular meetings from twelve to eight, starting from 2016. "Eight of the twelve meetings will be roughly evenly spaced throughout the year, with one meeting roughly halfway between each Inflation Report…the remaining four meetings will be used both to decide on the monetary policy stance and to hold MPC-FPC discussions on topics of mutual interest," the report said.
There are also two significant alterations to the whole monetary decision-making process. The first part of the MPC meeting, currently held the day before the announcement, will instead be conducted around one week beforehand. The second part of the MPC's meeting, currently held on the morning of the announcement, will be divided into two parts: the main policy discussion will be conducted three days beforehand, on Mondays. Then the policy vote will take place on the Wednesday, one day before the announcement. Both meetings will be transcribed and the MPC minutes will be published on Thursday, alongside the policy announcement.
A bit of history
The BoE has changed significantly in the last two decades. The sweeping changes at London's Threadneedle Street began with the Bank of England Act of 1998, when the MPC was established and became the fully politically independent rate-setting body within the central bank in order to enhance the trust and credibility of this institution.
But even the BoE's independence and new operational structure failed to avoid the detrimental consequences of the 2008 financial crisis. The Bank's communication strategy at that time lacked comprehensive language and timely messages from the policymakers that could prevent the worst.
The Old Lady of Threadneedle Street therefore needed fancier make-up to withstand headwinds.
When Mark Carney became the 120th governor of Bank of England in July 2013, markets viewed the occasion as a breath of fresh air compared to the stern and academic attitude of former governor Mervyn King. The BoE switched from blurry fan charts to numerical tables, from academic newspeak to simpler language so that both markets and the public could comprehend the message.
Even though the original concept of 'forward guidance' policy introduced by Carney on his arrival partly failed in forecasting errors, the intention to eliminate uncertainty and market noise by providing clearer messages to the markets remained the primary focus of the BoE's current communication strategy.
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