Emergency Bank move will not solve the problem

This is an immense show of force by the Bank of England trying to calm the credit markets. It raises some questions.

She underlines that this is a crisis and the bank has responded in emergency mode. The clear cause of this crisis was the chancellor’s mini-budget, which led to a loss of market confidence and skyrocketing interest rates on government debt.

This fall in the value of loans to the government could become a “significant risk to financial stability,” the bank says.

Therefore, it will now buy up these loans in unlimited amounts for a temporary period. The effective interest rates charged to the UK government in these markets spiraled to 20-year highs. That has now fallen behind.

But it was not a decision by the bank’s monetary policy committee that was informed of the decision after it was made by the bank’s financial experts.

It comes at exactly the same time that this committee was committed to pursuing the exact opposite policy – selling sovereign debt. The trial was supposed to start next week and has been delayed.

It’s a massive intervention, but it could confuse markets as to the clarity of policymaking and accountability. Sterling has fallen sharply again and is near all-time lows. This will not solve the government’s problems. It might buy them some time.

The Bank of England’s move was fueled by the potential for chaos in a corner of the financial services industry that supports pension funds. This was the concrete threat to financial stability that prompted the Bank of England to act.

The speed and extent of the fall in the value of government bonds, called gilts, which pension funds have to invest in because they are typically so stable, is putting those investments under pressure.

The risk was that the assets would have to be revalued or valued at the current low prices. That, in turn, could have forced pension funds to sell other assets, such as stocks.

This explains why the monetary policy committee, which normally approves bond purchases, did not make this decision. Insiders insist the decision says nothing about where interest rates might go and is not a form of monetary easing or “money printing” created out of thin air to help a troubled government get funded.

But all of this is only necessary because of the sharp turn against the UK public debt since the mini-budget. It’s dramatic emergency medicine. The risk remains. It doesn’t solve the underlying problem.