Deciphering Delphic Guidance: The Bank of England and Geopolitical Uncertainty (2026) [Link]

Forthcoming, Journal of International Money and Finance

Abstract

The effective transmission of monetary policy can be severely hampered by geopolitical uncertainty, at times necessitating central banks to adapt their tools and communication strategy in order to maintain market expectations anchored. Using the case of the UK 2016 referendum on EU Membership as a prominent example of geopolitical uncertainty, this paper examines how the Bank of England (BoE) adopted in response various methods of influencing market rates, including conventional, unconventional monetary policy measures and communications on forward guidance. To investigate the effectiveness of BoE’s communication, we first decompose long-dated yields into a risk neutral and term premium component. Text-based analysis of Monetary Policy Committee minutes is then used to measure the stance of policy, attitudes to QE and geopolitical uncertainty. We show that the Bank’s communication strategy acted to complement 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 geopolitical uncertainty.

Keywords: geopolitical uncertainty, risk premium, monetary policy, central bank communication, text mining

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