August is known for being the most boring stretch of the news cycle, but the BoE did its best to jazz things up last Thursday, releasing its interest rate decision, meeting minutes and quarterly inflation report simultaneously, breaking with the traditional data drip-feed. Many cheered “Super Thursday” as a revolution in transparency—no more delayed meeting minutes!—and a chance to better connect the dots on the BoE’s thinking and next move. Pundits spent the day reading the tea leaves for clues on when the BoE will hike rates. Yet we suggest not over-thinking this data delight. No matter the information at your disposal, central bank moves are impossible to predict, and the first rate hike in a tightening cycle likely doesn’t mean much for investors anyway.
Like Fed Chair Janet Yellen, BoE Governor Mark Carney says interest rate decisions are data-dependent. But there is no rate-hike formula. Even if you could do the impossible and accurately predict every relevant economic data point, there is just no way to know how the nine ladies and gents on the Monetary Policy Committee (MPC) interpret the numbers. Or what consensus decision their competing opinions and biases will foster.
Forward guidance doesn’t help, and not just because Carney’s was so spotty he earned the moniker of Britain’s “unreliable boyfriend” during a Parliament appearance last year. External factors matter, too, like falling oil prices, which brought the UK inflation rate below zero for the first time ever in February. Before prices cratered, Carney hinted the BoE may begin lifting rates in 2015. Since then, he has backtracked, and market-based rate hike expectations have now shifted to Q2 2016.
Carney has said “the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year,” but he also said Thursday the initial hike’s timing “cannot be predicted.” But this, of course, doesn’t stop central bank-obsessed analysts from trying. Hence the Super Thursday frenzy. Carney has stated he’s looking at three main criteria to determine when to encourage tightening: an above-average economic growth trend, rising wages and a pickup in core inflation. Right now only wage growth would seem to support the case. So analysts looked to the Super Thursday treasure trove for more hints on how the BoE views these trends and what their expectations are, all so they can divine when rates will rise.
And oh, the things they looked at. The BoE’s “fan charts”[i] showing policymakers’ forecasts of CPI and GDP growth rates attracted heavy scrutiny, with inflation expectations falling from May’s charts and GDP expectations rising a tad. Mixed signals! So pundits parsed the inflation report for buzzwords like “productivity” and “slack,” looking for qualitative clues—presuming less labor market slack means wages and thus inflation will rise (central bankers fall for the wage-price spiral myth too, folks). Others watched the interest rate decision, believing dissenting votes would start the rate-hike stopwatch. Two gents voted for rate hikes last year, driving the last round of frenzied rate-hike speculation, only to back off as inflation fell this year. Once these bellwethers turn, some believe it is just a matter of time before the bank hikes, presuming the split starts the conversation. But on Super Thursday, only one turned. More mixed signals!
We suggest not reading into any of this. Whether served via drip feed or an all-you-can eat platter, central banks’ reports and proclamations are almost always full of vagueness and mixed signals—often by design, lest policymakers back themselves into a corner. We suggest tuning most of it out and heeding what BoE Deputy Governor Ben Broadbent told the BBC Friday: “We are responding to things that are essentially, to some degree, unpredictable. It would not just be impossible, it would be foolish to pre-announce some fixed date of interest-rate changes.” In other words, they don’t know, and they can’t know, so no one else can know.
Besides, we don’t need to know. Fun as the guessing game might be if you’re into that sort of thing, the first rate hike in a tightening cycle isn’t actionable for investors. It isn’t something you need or should try to time, as stocks have no set reaction. On the day of, they rise sometimes, fall others. Same goes for the following weeks and months—all just normal volatility. But over time, stocks often continue rising. Since the US went off the gold standard in 1971, no initial BoE (or Fed) rate hike has ended a bull market. The BoE began raising rates in 1994, then again in 1996—and again in 1999—but the bull continued until 2000. Global stocks rose 125% from 1994’s first hike through 3/24/2000, the bull market’s peak[ii]. They started raising rates in November 2003, but the bull market lasted over four more years, rising 85.2%.[iii]
So even though Super Thursday was sort of a dud, we wouldn’t fret the lack of earthshattering insight. They’ll hike when they hike, and with the UK yield curve still plenty steep, stocks should be well able to handle rates somewhere north of 0.5%.
[i] In terms of the following they attract, the fan charts (named because they look like something you fan yourself with on a hot day) are the BoE’s equivalent of the Fed’s infamous dot plot of interest rate forecasts. Like the dot plot, the fan charts are fun Rorschach tests with no predictive power, no matter how much the BoE hypes them.
[ii] In USD. Measured in sterling, world stocks peaked in September 2000. FactSet, as of 8/11/2015. MSCI World Index return with net dividends, 9/12/1994 – 3/24/2000.
[iii] MSCI World Index return with net dividends, 11/6/2003 – 10/9/2007.