It’s nearly that time of year when the biggest names in the US central banking community gather for the Federal Reserve’s annual conference in Jackson Hole. And while this year’s conference will now be virtual, it should nevertheless carry more weight and significance for the global investor community than usual. The need to compare notes, to spot any potential shift in thinking, is more pressing than ever.
Central banks need to be formulating and communicating a clear and coherent plan for how they intend to exit the extraordinary policies put in place during the crisis. Perhaps because Bank of England governor Andrew Bailey did not plan to attend in person, the BoE chose to communicate its exit strategy earlier in the month. Global investors — of both stocks and bonds — should take a careful look at this blueprint. If mirrored by other central banks, it will have significant implications for global markets.
The plan is as follows. The BoE’s main interest rate that is currently 0.1 per cent — known as Bank Rate — will rise first. But when it reaches 0.5 per cent, the BoE will switch its focus and start to reduce its balance sheet by not reinvesting the funds it receives as its holdings of government and corporate bonds mature. If that proceeds smoothly, the central bank might start raising rates above 0.5 per cent. When this main rate reaches 1 per cent it will consider actively selling some of its bonds, leading to a quicker reduction in the balance sheet.