The facade of the Bank of England in London, August 6, 2020 (AFP/DANIEL LEAL-OLIVAS)
The Bank of England intervened again on Tuesday in the face of “dysfunctions” in the markets and risks of “financial instability” without reassuring investors, while the IMF called on London not to frustrate monetary policy efforts.
The central bank had already launched on September 28 a program to repurchase long-term Treasury bills for up to 65,000 million pounds.
It raised the maximum size of its daily trades to £10bn on Monday. On Tuesday, he expanded his action to inflation-linked bonds, which make up about a third of UK Treasury bills.
The operation has not yet calmed the British debt market and the interest rates of the 30-year public debt ended at 4.80%.
The Bank of England described “a significant risk to the financial stability of the United Kingdom”.
The International Monetary Fund (IMF), during a press conference this Tuesday on the occasion of the publication of its latest economic forecasts, recalled that financial stability is part of the “mandate of central banks.”
“On the one hand, they continue to tighten money in the face of inflationary pressures and, at the same time, face pockets of market dysfunction, in the case of the UK, perhaps pension funds and LDI investments,” commented the economic adviser. of the IMF, Pierre-Olivier Gourinchas.
– Two people behind the wheel –
The rise in government borrowing rates, which represent the cost at which the UK finances itself, is accompanied by a fall in the price of these securities, a sign of the distrust of investors who are selling them.
However, these assets are very popular with UK pension funds. In addition, many of these funds use so-called LDI (“Liability Driven Investments”) strategies that use derivatives, in particular government bonds.
Given the drop in the value of these assets in recent days, they must reinject liquidity, the phenomenon of margin calls. This forces them to sell securities quickly. Hence the risk of an uncontrolled downward spiral and a market in which the assets no longer find interest.
The BoE intervened in particular to break this vicious circle and prevent pension funds from being weakened and spilling over into other markets and the real economy.
But his purchases of government debt securities are only scheduled until Friday and investors are worried about what happens next. Hence the fever that persists.
Liz Truss’s government had set fire to gunpowder by presenting on September 23 a “growth plan” consisting of colossal support for electricity bills combined with large tax cuts, without these actions being fully quantified or financed.
Investors began to liquidate some British assets: the pound sterling fell to an all-time low and the price of long-term debt securities melted.
Chancellor of the Exchequer, Kwasi Kwarteng, has tried to calm things down by presenting, in the face of repeated calls from economists and parliamentarians, a budget presentation for October 31, instead of November 23.
British Finance Minister Kwasi Kwarteng at the Conservative Party Congress on October 4, 2022 in Birmingham (AFP/Oli SCARFF)
A decision hailed by the IMF even if Mr. Gourichas criticized Downing Street’s action.
“Fiscal policy goals need to be aligned with monetary policy goals. If you have a central bank trying to tighten” rates in the face of high inflation as is the case in the UK, and while the government “wants to stimulate demand” with a massive budget package, “is like having a car with two people trying to turn the wheel in a different direction,” he argued.
The Fund, in its Autumn Economic Report on Tuesday, forecast a significant slowdown in UK economic activity (projected growth slightly above 3.6% in 2022 but below 0.3% in 2023).
He believes that even if the government manages to slightly boost the Gross Domestic Product (GDP) in the short term with its budget announcements, at the same time it will complicate the fight against inflation given its magnitude and the financing provided by indebtedness.
Therefore, UK markets are likely to remain turbulent until Mr Kwarteng’s presentation on October 31, who will by then be under pressure to find cuts in public spending to finance his expensive ‘growth plan’.
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