Deciphering Delphic Guidance: The Bank of England and Brexit

IMF Working Papers, July 19, 2024

Source details

Authors: Jagjit Chadha, Corrado Macchiarelli, Satyam Goel, Arno Hantzsche, Sathya Mellina
Published: July 19, 2024
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400284649.001

In response to the 2016 referendum on EU Membership and ensuing uncertainty about the eventual consequences of Brexit, the Bank of England (BoE) adopted methods of influencing market rates, including conventional and unconventional monetary policy measures and communications on forward guidance.
The paper investigates the effectiveness of BoE communication by decomposing long-dated yields into a risk neutral and term premium component and by using text-based analysis of Monetary Policy Committee minutes to measure the stance of policy, attitudes to QE, and attitudes to Brexit.
The authors find that the Bank’s communication strategy complemented the stance of monetary policy—which had responded by lowering Bank rate and expanding QE—and acted to lower the term premium that might otherwise have risen in response to Brexit uncertainty.

Decomposition of long-dated yields into:
- risk neutral component
- term premium component
Text-based analysis applied to Monetary Policy Committee minutes to measure:
- stance of policy
- attitudes to QE
- attitudes to Brexit

The BoE’s communication strategy acted to complement monetary policy actions (lowering Bank rate and expanding QE).
Communication helped to lower the term premium that might otherwise have increased due to Brexit-related uncertainty.

Central bank communications can play a stabilizing role alongside conventional and unconventional monetary policy during periods of geopolitical and policy uncertainty.
Coordinated use of forward guidance and quantitative easing can mitigate increases in term premia driven by uncertainty.

Authors: Jagjit Chadha, Corrado Macchiarelli, Satyam Goel, Arno Hantzsche, Sathya Mellina
Publication date: July 19, 2024
Series: Working Paper No. 2024/160
Issue: 160
Volume: 2024
Pages: 43
DOI: https://doi.org/10.5089/9798400284649.001
Stock No: WPIEA2024160
ISBN: 9798400284649
ISSN: 1018-5941
Subjects: Central bank policy rate, Financial institutions, Financial services, Monetary policy, Sovereign bonds, Unconventional monetary policies, Yield curve
Keywords: Bank of England MPC communication, BoE action, BoE strategy, BoE's monetary policy, Brexit, Brexit referendum, central bank communication, Central bank policy rate, Global, monetary policy, risk premium, Sovereign bonds, text mining, UK referendum, Unconventional monetary policies, Yield curve

IMF Working Paper: "Deciphering Delphic Guidance: The Bank of England and Brexit", Working Paper No. 2024/160, July 19, 2024.