Bank Of England Emergency Action, What It Means

Central Banks are intervening more in markets. I don’t want to repeat what market participants are telling me about the Bank of England’s (BoE) move to save pension funds from supposedly going belly up. They bought an unlimited amount of sovereign bonds to bring yields down and bond prices back up. They were supposedly afraid of a wave of insolvencies. That’s the word on the streets of London.

“The Bank of England is in a sense responsible for this because they have hopped onto this central banker hubris right now, which is to dampen demand to stop inflation,” says Vladimir Signorelli, head of Bretton Woods Research. “I believe this means they are going to flood the U.K. monetary system with liquidity. When the Bank of England buys bonds, it puts more liquidity into the economy, but when you have more (British) pounds in the economy than is necessary, then you have a pound that gets weaker and weaker. It’s money printing. That is their answer. Their answer to contraction is money printing.”

Markets are unstable, economic situations are dire, and the reputations of lawmakers have been shredded into pieces. This is the view among traders who are looking at the U.K.’s fixed income and forex markets, says Naeem Aslam, chief market strategist for AvaTrade in London.

“The BOE’s announcement has shown that the water is over their heads now. They need to do whatever it takes to bring borrowing costs down,” Aslam says. The initial announcement has brought some relief in the U.K. bond market, but the pound has become even more volatile,” he says, adding that the current move by the BoE will not put any dent in inflation. “The next step will be the un-scheduled announcement of an interest rate hike,” Aslam says.

The bond market moves by the U.K. central bank follow last week’s mini-budget from new Chancellor Kwasi Kwarteng. U.K.-based financial analyst and commentator, Giles Coghlan, said that the trouble with the British pound started in the gilt market — the British sovereign debt market — when Prime Minister Liz Truss’s economic policies to fight inflation was “spoken about in an ominous sign of what was to come,” he says. Investors became dour.

“The Bank of England has acted to calm the bond market and that should support the Pound for now,” he says, and last until the BoE convenes at its next scheduled monetary policy meeting in November.

Other than a fairly decent natural gas reserve base now in Europe, nothing is really going right. Natural gas and oil prices have stopped falling and may rise again in the near-term. Vanguard expects a recession in Europe starting before the end of the year.

The latest S&P Global Ratings quarterly macroeconomic outlook says rising interest rates, increased European energy insecurity, and the lingering effects of Covid stimulus are packing a wallop on Western economies, with Europe in the worst shape.

“Our confidence is waning,” says S&P chief economist Paul Gruenwald.

The BoE blinked in the face of a pending financial crisis. And in the midst of all this, with inflation near record highs, at levels one sees in emerging markets, rates will go up, growth will slow, layoffs will happen. Will energy and food prices come down to help those losing their jobs in the months ahead in the U.K., Europe and, likely, the U.S.?

“They are all hell-bent on raising interest rates,” says Signorelli. “The Bank of England is willing to buy as many gilts as necessary to keep pensions solvent. They say it is temporary, but the policy will likely be sustained so long as the central bank is looking to reduce economic growth through interest rates. Unless this policy is rethought, it will lead to more liquidity in the U.K. and higher overall inflation.”