ALEX BRUMMER: It’s 12 years since the end of the financial crisis… How can such risky trading be happening all over again?
After days of sitting on its hands and months of refusing to tackle the looming spectre of inflation, the Bank of England has finally acted.
It had no choice. In the aftermath of Kwasi Kwarteng’s badly received mini-Budget last week, financial markets went into a tailspin, the pound falling to historic lows against the dollar.
Yesterday, the carnage intensified, with the long-term interest rates on Government bonds soaring to such an extent that a new credit crunch was threatened in Britain’s private-sector pension funds, in which trillions of pounds are invested.
In promising to buy some £65billion of government debt, the ‘Old Lady of Threadneedle Street’ has sought to prevent a meltdown. About one trillion Government bonds – known as gilts – are held in risky specialist funds.
These have halved in value in recent days, leading to fears that a chain reaction of insolvencies could follow, threatening the entire pension system.
After days of sitting on its hands and months of refusing to tackle the looming spectre of inflation, the Bank of England (pictured) has finally acted
The Bank’s new intervention will limit that damage and ensure that the pensions of up to ten million people with gold-plated ‘final salary’ schemes are protected.
The worst, for now, has been averted.
But we have to ask: How it is possible, 12 years after the end of the financial crisis, that institutions at the core of the consumer economy could be involved in such risky behaviour as investing in these specialist funds?
The Bank of England, through its Financial Stability Committee created after the 2008 crash, is meant to inoculate consumers and markets against such serious risk.
It has patently failed to do so. And once again, the taxpayer may have to pick up the tab. The Bank’s governor Andrew Bailey and its ‘stability chief’ Jon Cunliffe may yet find themselves in the political firing line as they try to explain how these funds found their way into the core of the financial system. But that is for another day. In the meantime, and in spite of the market’s bearish response to their tax-cutting mini-Budget last week, Liz Truss and Mr Kwarteng are determined to stick to their guns.
The PM and Chancellor not only believe that the costly energy price cap for households and business, which limits the ravages of high international gas prices, is critical if Britain is to avoid economic collapse, they also regard tax cuts as essential to lifting the UK out of its growth stupor. With its plans to buy Government bonds ‘on whatever scale is necessary’ and at an ‘urgent pace’, the Bank is seeking to settle some of the alarming volatility of recent days.
The intervention will be welcomed by pension funds and the very banks that have financed some of the risky activities, while homeowners, fearful of surging monthly mortgage payments, may also feel less panicked.
But it still marks a big U-turn. Only a week ago, at the last meeting of its rate-setting Monetary Policy Committee, the Bank said it would end its programme of buying Government bonds (known as quantitative easing) and aim to reduce its vast holdings of these assets by some £80billion.
Within days, it has been forced back into the market. This is all deeply unusual.
The Bank almost never intervenes to calm the gilts market, let alone back this up with a public statement.
And Mr Bailey has also acted with unusual speed. For months, he has been accused of showing insufficient grit in raising interest rates, particularly compared with his international peers.
In the aftermath of Kwasi Kwarteng’s (picturerd) badly received mini-Budget last week, financial markets went into a tailspin, the pound falling to historic lows against the dollar
His most recent dovish rise – by just half a percentage point – struck many as too little, too late, given that America’s Federal Reserve has repeatedly raised rates by three-quarters of a percentage point.
Bank of England chief economist Huw Pill is now cautioning that a hefty rise in its base rate is on the cards for November. It has been desperately resisting an emergency increase this week for fear of causing even more panic.
The fact is that much of yesterday’s drama could have been avoided had the Bank acted more boldly last week. The Old Lady knew that an expensive energy bailout for consumers and businesses was on the cards, and that a raft of tax-cutting growth measures was also on the way. Given all this, it should have acted faster.
So what next? First of all, we need a prompt investigation into how pension funds came to invest billions in the risky assets I mentioned earlier. The Bank’s oversight on this has been lax.
Second, the bond-buying will work in the short term. Speculators betting against the British economy may be inclined to think again.
Nevertheless, the Bank’s dramatic action shows how difficult it will be to guide the markets back to normality. And this may not be the last time the Old Lady rouses from her slumbers to surprise us all.
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