Recent events are the result of the fiscal misadventure of a careless, ideological government says Ambrose Evans-Pritchard for The Telegraph.
The Bank of England’s emergency purchase of gilts buys a reprieve of thirteen days at enormous institutional risk.
The rescue was a last resort to avert a doom loop in the pensions system and the £1 trillion mortgage market. It solves nothing in itself.
The Bank has been put in the invidious position of having to add unsterilised stimulus during an inflationary storm; or in cruder terms, it is having to print up to £5bn a day to bail out the fiscal misadventure of a careless, ideological government.
All evidence is that the Prime Minister and her inner circle think they can pocket this stay of execution and persist as if nothing has changed. Such a course puts this country in serious jeopardy.
Five-year gilt yields have risen 22 basis points today on her latest utterances. She is already exhausting the Bank’s magic.
Global investors begrudgingly accept that the Bank’s intervention - less than a week before it was due to start quantitative tightening, which is the exact opposite - was to head off “a material risk to UK financial stability” in a broken market.
They accept that the Bank had to act to stop a Lehmanesque chain-reaction of margin calls on derivative hedge contracts. “No, this is not QE. It’s a liquidity measure,” said Benjamin Nabarro from Citigroup.
They will stop being so forgiving if there is no resolution of the underlying problem by October 14 and if events then force the Bank of England to continue shielding the bond market. They will conclude that it has succumbed to fiscal dominance at the service of Peronist policies. That would be a calamitous development.
The clock is ticking. The Bank will stop its emergency bond purchases on October 14. If the Prime Minister digs in and refuses to make any substantive change over the next twelve days, we can assume that global investors will again decline to finance her fiscal expansion.
The Bank of England will then face a choice: It can either resume bond purchases, lose all authority, and go the way of the Turkish central bank; or it can raise rates to 5pc or 6pc to try to stem a combined run on the pound and the gilts market, causing a housing crash and a bloodbath of business bankruptcies. Nor is there any guarantee that the latter course would stabilise the financial system.
One hates to say it in a Tory newspaper, but the Government seems embarked on a course of sheer madness.
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Liz Truss and Kwasi Kwarteng may justifiably feel that they are misunderstood.
Credit: REUTERS/Dylan Martinez
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