In past newsletters (see here and here), we’ve discussed the growing use of policy as a thumb on the economic scale. Now, with volatility rising and some markets threatening to seize up, policymakers appear to have seen the size of the economic shark they are fighting and had the thought that, with apologies to Jaws, they’re “going to need a bigger thumb”.
“Significant Repricing”
The Bank of Japan’s move to prop up the yen last week is a straightforward example of the policymaker thumb, however, the Bank of England’s moves over the last several days show in even starker contrast how quickly “necessity” can become the mother of intervention. After ending its most recent meeting with the decision to raise rates 50bps (in a split decision), the BoE then released a “market notice” announcing its intentions “to reduce the stock of purchased UK government bonds”. QT full speed ahead! The new Truss administration then announced a sweeping program of tax cuts and investment incentives last Friday, which helped push the pound to new lows and spike Gilt yields. Monday saw the BoE release a Statement from the Governor of the BoE, saying that the Bank was “monitoring developments in financial markets very closely in light of the significant repricing of financial assets” and would “not hesitate to change interest rates by as much as needed to return inflation to the 2% target”. Two days later, with pensions on the line and as Gilts continued to bleed, the BoE reversed course via another “market notice”. In its statement, the BoE said that it was acting in the interest of financial stability and “stands ready to restore market functioning and reduce any risks from contagion to credit conditions”. It would, therefore, “carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.” Despite the purchase of bonds, the BoE stated that its target for balance sheet reduction was “unaffected and unchanged”, even with the commencement of the reduction being pushed off until October 31. Paging Mike Tyson.
In the meantime, various forms of intervention are popping up elsewhere at an accelerating rate of speed. From the Chinese urging banks to prepare to sell dollars to the Germans following the UK down the price control road with a spate of policies to control the turbulence in the energy market, it’s clear that policymakers are growing increasingly comfortable with using their thumbs in place of the invisible hand. After all, when needs must…
P.S. In his latest op-ed on the Fed, Mohamed El-Erian (whose commentary we’ve referred to several times, including here, here, and here) warns that the Fed must continue on its course of tightening and should do “more to contain the adverse spillovers of its policy mistake”.
