BoE ‘monitoring developments’ amid market ructions

The Bank of England put out an unusual statement today (September 26), noting it was “monitoring developments”, as markets suffered intense volatility following a government budget announcement.

However, in the statement – issued just after local stock markets closed – governor Andrew Bailey stopped short of announcing an early meeting of the monetary policy committee. Earlier in the day, some analysts had predicted the BoE might hike rates at an unscheduled meeting.

“The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term,” Bailey said. “As the MPC has made clear, it will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the government’s announcements, and the fall in sterling, and act accordingly.”

The committee is next due to meet on November 3. Bailey said the MPC will “not hesitate to change interest rates as necessary”.

On September 23, UK finance minister Kwasi Kwarteng set out a programme of tax cuts alongside major spending to shield households and businesses from higher energy prices.

Investors questioned the credibility of the plans at a time when inflation is running at 9.9%. In early trading, the pound crashed as much as 4.7% against the dollar, though it fully recovered the losses by midday London time. Sterling fell again after the BoE’s announcement, and was down 0.8% at 5pm UK time.

Bond markets were also roiled, as investors predicted the BoE could make an emergency rate increase as soon as this week. At 4.30pm, gilt yields were up across the curve, 44 basis points higher at a two-year maturity, 42bp for five-year maturities, 35bp for 10-year yields and 43bp for 30-year bonds. The 10-year benchmark traded with a yield of 4.2%.

JP Morgan analyst Allan Monks said the market shock “looks outsized” relative to the “incremental news” given when the government announced its “mini-budget” on September 23.

In his statement, Bailey noted that the government’s efforts to curb energy prices were expected to limit inflation in the short term, to around 11% in the BoE’s latest estimate. Previously the central bank had predicted inflation of more than 13% this year.

“I welcome the government’s commitment to sustainable economic growth, and to the role of the Office for Budget Responsibility in its assessment of prospects for the economy and public finances,” Bailey added.

Kwarteng had previously avoided an assessment by the OBR of the impact of the government’s tax cuts and spending plans, which come alongside a promise to bring the deficit under control in the coming years. However, he said today that the government would release further details of its “medium-term fiscal plan” on November 23, alongside a “full forecast” by the OBR.

Sushil Wadhwani, chief investment officer at asset manager PGIM, described the government’s finances as “simply not sustainable”.

“The Chancellor has spoken of a medium-term fiscal plan which is reliant on control of public spending,” Wadhwani, a former BoE MPC member, said in a note. “However, most are rightly sceptical of promises to cut public spending in three years’ time.”