The Bank of England governor plans to stick – but it is a gamble
Andrew Bailey is not for budging. The emergency gilt-buying scheme will end on Friday, says the governor of the Bank of England, and you’d better believe him. “You’ve got three days left now,” he warned pension funds on Tuesday evening, urging them to get their liquidity positions in order. And, in case anybody still doubted his determination, Threadneedle Street said the same again on Wednesday.
At this point, we must assume Bailey means it. If the Bank performed a U-turn on its gilts market operation, nobody would believe anything it said in future. So why has the governor chosen to go to war over a programme under which only relatively modest sums have been spent so far? And what happens if more mayhem breaks out in gilt markets next week when the Bank says it will be offside as a buyer?
The answer to the first question is the old one about the Bank not wanting to be seen to be diverting from its core mission to put a lid on inflation. Remember that a mere five days before the gilt-buying operation was announced on 28 September, the Bank had been planning to do the opposite and start selling a portion of its £875bn pile of government IOUs. The emergency diversion was like gorging on Mars Bars before starting a diet; yes, for the sake of seriousness, you want to keep the binge as brief as possible.
Up to a point, then, one can admire the determination to get back to the main inflation-fighting brief. An enormous problem arises, however, if markets freak out next week. As it is, the 30-year gilt yield hit 5% on Wednesday, the level that prompted the late-September intervention after Kwasi Kwarteng’s mini-budget. It returned to 4.8% later in the day, but is it really credible that the Bank would sit on the sidelines if,
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