To calm markets, BoE will buy bonds on ‘any scale necessary’

The rapid rise in bond yields has also roiled Britain’s mortgage market, with some lenders withdrawing offers on new mortgages because it has become too difficult to price.

“The government’s decision to scrap some tax cuts, or cut spending sharply, will help relieve pressure” in the currency and bond markets, Samuel Tombs, an economist at Pantheon Macro Economics, wrote in a research note. But the actions it has taken so far has undermined confidence among global investors, something that cannot be easily restored. Accordingly, a painful recession caused by rising borrowing costs awaits us.”

Market turmoil and central bank intervention reveal how inconsistent the government’s plans are with the bank’s monetary policy objectives. The government is trying to generate rapid economic demand, while the bank is trying to cool it down to reduce inflation. Consumer prices rose about 10 percent in August from a year earlier, putting the inflation rate at levels not seen since 1982.

On Tuesday, Howe Bell, chief economist at the Bank of England, said the government’s fiscal plans would be met with a “substantial” response from Bank of England officials, who are due to meet again in early November. Markets are betting that interest rates will rise above 5 percent early next year, from 2.25 percent.

Just last Thursday, the central bank said it would begin its plan to sell bonds back to the market – a process called quantitative tightening – as it tried to end a long era of easy money in its fight against inflation. She insisted there would be a “high impediment” for the bank to deviate from the plan, which over the next year will reduce its bond holdings by £80 billion through sales and redemptions, to £758 billion. The bank said on Wednesday it was delaying the start of sales until the end of October.

McGuire said that even as the bank tried to distinguish between Wednesday’s efforts to ensure financial stability and the bank’s monetary policy stance, the intervention risks exacerbating confusion in the markets about the central bank’s goals.

Among the questions, he said, are: “Are we trying to contain inflation? Are we fiscally resisting expansionary government? Are we doing quantitative tightening?” Or alternatively: “Are we doing the opposite? Are we increasing inflationary pressure? Will we simply continue to buy more bonds?”

The lack of clarity, he said, “does not appear to be positive regarding the UK asset outlook.”