Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.A senior European Central Bank executive has said publishing the interest rate forecasts of its policymakers — similar to the US Federal Reserve’s so-called “dot plot” — could help to address shortfalls in its communication and tackle market volatility.Isabel Schnabel, one of the most influential voices on the ECB’s board, said in a speech on Wednesday that the central bank may benefit from adopting some of the ideas raised by former Fed chair Ben Bernanke in his recent review of the Bank of England’s forecasting processes.“Some of the points he [Bernanke] raised could also be of relevance to the ECB,” Schnabel said. “One area of reflection relates to whether policymakers’ views on their expected future path of short-term interest rates should be made more transparent, akin to the ‘dot plot’ used by the Federal Reserve System.”Her comments — the first time an ECB executive has suggested such a shift — show how central bankers are questioning the fundamental way they set monetary policy after widespread criticism they were too slow to react when inflation started to surge in 2021.Schnabel said it would “come with risks” if central banks returned to the way they operated before the Covid-19 pandemic sowed the seeds of the biggest price surge for a generation.The standard process of communicating their plans through adjustments to a central inflation forecast “may require a deeper rethink, even if inflation is getting closer to levels consistent with price stability”, she said.Since their introduction in 2012, the dot plots have become one of the Fed’s most important communications tools, enabling its policymakers to tell markets what they expect to do with interest rates in the coming months.Bernanke, who launched the dot plot at the Fed, stopped short of recommending the BoE follow suit — despite widespread support for the idea among economists. But he said it “should be on the table” for future debate after presenting the results of his review last week.The ECB, led by president Christine Lagarde, publishes staff forecasts for the economy based on market expectations of rates but it gives little indication of what its governing council members expect to happen to policy rates in future. An official account of council members’ discussions published four weeks after each policy meeting is anonymised and lacks detail.Schnabel said publishing the rate forecasts of individual council members “could help signal the risks members of the committee attach to the baseline scenario built by staff”.She added: “A dot plot can therefore help convey the uncertainty about the future path of the economy and simultaneously provide greater clarity about where policymakers see interest rates moving in the future, potentially working against excessive market volatility.”The theory behind the dot plot is that laying out the rate path expected by policymakers will enable longer-term borrowing costs to adjust to the Fed’s plans, meaning monetary policy can have more impact on economic conditions.However, Fed watchers do not always buy the projections. At the start of the year, the dot pots showed US rate-setters expected to cut rates three times over 2024.Markets, however, priced in six cuts and only adjusted their expectations after data showed the US economy — and inflation — remained stronger than anticipated by either the Fed or investors.Schnabel said a potential “downside” of publishing rate forecasts is that they could “overly condition market pricing, thereby de facto reducing its informational content”, pointing to research showing they have lowered US long-term yields by 1.3 percentage points over the past decade.She added the ECB could also consider publishing more details of the views within the council as part of its use of alternative scenarios to illustrate the different paths inflation could take. More

Andrew Bailey struck an upbeat note about the Bank of England’s efforts to quell inflation on Wednesday, insisting the latest data shows the UK is “pretty much on track” with the central bank’s forecasts. In contrast with the US, where the Federal Reserve now looks likely to delay interest rate cuts as economic growth and inflation are stronger than expected, the BoE governor said the UK is in the midst of a “pronounced period” of disinflation.“European inflation dynamics are somewhat different,” he said during a conference hosted by the Institute of International Finance in Washington DC, adding that he expected a sharp drop in inflation in next month’s numbers. “There’s more demand-led inflation in the US.” Bailey’s sanguine tone came even after official data released in London the same day gave traders pause for thought. The numbers showed UK inflation eased slightly less than expected in March, falling from 3.4 per cent to 3.2 per cent rather than the 3.1 per cent analysts had forecast. Annual growth in the price of services, which BoE policymakers view as a better measure of underlying inflationary pressures in the economy, also slowed less than expected, from 6.1 per cent to 6 per cent.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Labour market data released earlier in the week also pointed to lingering wage pressures that could continue to fuel prices in the coming months.An uptick in oil prices, while not yet a source of serious alarm, could also become a bigger headwind if tensions in the Middle East worsen.All this has fuelled doubts over the prospect of early UK rate cuts. Market pricing now suggests the BoE will not start to cut its benchmark rate from its current 16-year high of 5.25 per cent until September or November — similar to expectations for the first move from the Fed. Little more than a week ago, traders were betting the MPC would cut as early as June.Elizabeth Martins, senior UK economist at HSBC, said that if the aim of Bailey’s comments was to convince investors that the UK did not face the same risks as the US of inflation reaccelerating, “this morning’s figures did not help”. Yet she and other economists said even if price pressures took longer than expected to subside, the BoE’s position was very different from that of the Fed, with UK inflation still on a downward trajectory, albeit a slower one.“All in all, we think a healthy dose of perspective is required . . . the big picture remains one of disinflation,” said Gabriella Willis, economist at Santander.At 3.2 per cent, UK headline inflation is now lower than the latest US reading of 3.5 per cent for the first time in three years, helping Britain shake off its position as an international outlier, even if the measures are not strictly comparable.The reasons for inflation remaining sticky also differ. In the UK, policymakers say lingering price pressures largely reflect supply side constraints — in particular, rising ill health in the workforce — that has kept the labour market tight and wage growth strong. In the US, prices are fuelled by the strength of consumer demand.The IMF on Tuesday said the US economy will grow by 2.7 per cent this year, in contrast with a small expansion of 0.5 per cent in the UK. Clare Lombardelli, chief economist at the OECD, told the House of Commons Treasury select committee on Tuesday that the divergence between a strong US economy and weaker European ones was the biggest recent change in the global outlook. “The outlook for US interest rates and US inflation and growth is quite markedly changed now,” said Lombardelli, who will join the BoE’s MPC in July.“I’m not going to put a date on when I expect the UK to start the process of loosening monetary policy, but it is clearly the case that will be the direction of travel,” she added.While economists differ on when the first UK rate cut will come, most said Wednesday’s inflation data would not be a barrier to the BoE making a first move as soon as June, or in August or the early autumn.Bailey reiterated that each meeting of the Monetary Policy Committee is “in play” as policymakers judge progress towards the BoE’s 2 per cent target each time it meets. The MPC next sets rates on May 9.Even if an economic upswing gains momentum, “we still think that the recovery won’t be strong enough to prevent inflation from falling”, said Ruth Gregory, deputy chief UK economist at consultancy Capital Economics. “The big difference is that the UK economy is not as strong as the US and activity is picking up from a weaker starting point,” she added. The big question, however, is whether the BoE will feel comfortable pressing ahead if the Fed remains on hold, even if the outlook for domestic inflation justifies it.Bailey, like Christine Lagarde at the European Central Bank, has been keen to signal that the BoE will set its own course.But Simon French, head of research at investment bank Panmure Gordon, said it would be “uncomfortable” for the BoE if divergence from US monetary policy led sterling to weaken against the dollar to a degree that could “invite more inflation, rather than less”.“It is all very well setting policy based on domestic inflationary dynamics,” he said, referring to recent comments by Bailey and Lagarde. He added: “I don’t think markets really believe them. That is the problem.” More

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