- Bank of England fails to reassure investors with emergency rate hike
- Bond yields soar amid talk of a historic bear market
- Bank of Japan defies trend but yen’s fall requires intervention
The UK has plunged into a full-fledged financial crisis after the astonishingly inept announcement by the new government on Friday that it would cut taxes and run up debt while the central bank proceeds to sell off some of its government bond portfolio.
The rushed toward parity with the dollar and yields on UK government bonds skyrocketed as the Bank of England failed on Monday to reassure investors with an emergency rate hike, pledging only to consider the matter at its next monetary policy meeting in November.
Global investors have pummelled the government of Prime Minister Liz Truss and her finance minister, Kwasi Kwarteng, with a massive sell-off of the currency and gilts, as government bonds are known.
Keep in mind that nobody elected these people. Under the quirky and creaky parliamentary system in the UK, the new prime minister was chosen by fewer than 200,000 Conservative Party members after former Prime Minister Boris Johnson resigned under pressure over government parties during pandemic lockdowns.
Truss in turn picked a onetime economic historian who nonetheless has been in parliament since 2010 and was in Johnson’s cabinet to launch a fiscal stimulus just as the country, along with the rest of Europe, is poised on the brink of recession.
Bank of England Governor Andrew Bailey evidently was not inclined—or was told that he was not inclined—to help as the crisis took on its own momentum Monday.
The crisis in the UK overshadowed the widely expected victory of a far-right party in Italy’s snap election Sunday. Giorgia Meloni, whose Brothers of Italy party has its roots in Italian fascism, is poised to become the country’s first female prime minister as she pledges to follow a moderate path in government.
Yields on the Italian government bond rose to nearly 4.7% in the wake of the vote, from just above 4.3% on Friday. But yield on the gilt rose to nearly 4.3% on Monday after hitting more than 3.8% on Friday, compared to under 3.4% on Thursday, ahead of the disastrous “mini-budget” announced the following day.
The situation in Britain, where was already forecast to hit double digits and now will be worse with the plummeting currency, makes the situation in the rest of Europe seem somewhat less dire.
European Central Bank President Christine Lagarde, however, warned again on Monday that the ECB will raise repeatedly over the next several policy meetings to cool demand and “guard against the risk of a persistent upward shift in inflation expectations.”
The Bank of America is already forecasting that the world is entering into its third historic bear market in bonds, after that in 1899 to 1920 and then 1946 to 1981. A French market strategist estimates that bond portfolios have already lost 20% of their value since their high point.
The Bank of Japan, meanwhile, is refusing to join other central banks in the helter-skelter rush to raise rates, as the governor, Haruhiko Kuroda, announced last week that the bank would stick with its policy of keeping short-term bond yields at minus 0.1% and yields at around zero.
The has lost nearly 30% of its value against the dollar since the beginning of 2021 and continues to fall. The central bank had to intervene in currency markets last week for the first time in more than two decades to stem the currency’s decline.
The Fed is keeping with its plan to keep aggressively raising rates until declines in a convincing fashion. The new president of the Boston Fed, Susan Collins, said in her first policy speech Monday that there were signs that price increases from supply-chain disruptions were beginning to abate, but the Fed must keep at it to head inflation in the direction of its 2% target.
Collins is a voting member of the Federal Open Market Committee this year. Her largely dovish speech, saying there was still a good chance of avoiding a hard landing for the U.S. economy, nonetheless reflected the Fed’s resolve to break inflation.