Yahoo Finance How gaffe-prone Andrew Bailey sent markets into another tailspin
As Andrew Bailey appeared in Washington on Tuesday evening, bruised markets were hoping for some soothing words.
Instead, the Bank of England Governor used his first appearance since the chaos after the mini-Budget to put the pound and bonds on another rollercoaster ride - and ignited pension chiefs’ nerves by insisting that the Old Lady of Threadneedle Street is not for turning.
After playing financial whack-a-mole since the mini-Budget with an emergency bond-buying programme, Bailey laid down an ultimatum to pension schemes that are relying on his support. Insisting that support will not be extended beyond Friday, he said: “You’ve got three days left now.”
Mr Bailey added: “We will be out by the end of this week; we think the rebalancing must be done."
In the hours after the Governor’s comments, confusion reigned on markets as conflicting reports emerged and the pound whipsawed. Ex rate-setters and traders say Bailey could be putting his credibility on the line with a game of chicken with pension funds, which were forced into a fire sale of their assets to generate collateral during the market turmoil.
Chris Turner, ING’s global head of markets, says: “There's a lot of volatility out there but I think it's largely coming through the gilt market… there's going to be a lot more volatility between now and Friday evening.”
This Friday, the Bank’s multi-billion pound gilt-buying programme intended to calm markets and avoid disaster at pension funds will wrap up. The scheme was drawn up to support some pension funds that have come close to collapse after a sharp jump in gilt yields, forcing them to raise money quickly by dumping bonds.
Many traders believed the Bank would have little choice but to extend the purchases. But Bailey’s insistence that pension chiefs get their house in order triggered another tumble in the pound and gilts.
Sterling dropped by as much as 2pc against the dollar to slip below $1.10 for the first time since just after the Bank had first moved to calm market volatility with fresh bond purchases.
But shortly after 5am ahead of the opening of gilt markets later that morning, sterling suddenly clawed back half of its losses. A report in the Financial Times claimed that Bank officials have privately told pension bosses that the bond purchases could be extended.
However, Threadneedle Street then issued statements insisting that it is not bluffing.
“The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior levels,” the Bank said.
The pound fluctuated in choppy trading but the real action was on gilt markets.
The yield on a 30-year bond climbed by as much as 0.3 percentage points to breach the 5pc mark for the first time since the intervention by officials.
The benchmark 10-year gilt yield jumped to a 14-year high of 4.62pc, in further bad news for the Truss government as it prepares to issue a flood of bonds to pay for energy bills support and tax cuts.
Bonds and the pound recovered some of their losses later in trading as the Bank of England revealed it made the largest purchases of bonds under its scheme yet at £4.6bn.
But traders still believe UK assets face a crunch moment in the coming days.
“If gilts are still under pressure on Friday evening and the Bank withdraws, I think sterling will look very vulnerable in Asia Monday morning,” says Turner.
“It’s quite a dangerous environment to be withdrawing that support so I think there would be every chance the scheme is extended next week.”
The market chaos has raised more questions about the communications of the Bank under Bailey.
Some say the Governor’s first comments since the mini-Budget should have been made in a carefully prepared speech rather than Tuesday’s wide-ranging discussion in the US capital.
Even though the format was instead a "fireside chat", Bailey - an experienced public figure who previously led the Financial Conduct Authority - would have undoubtedly entered with prepared messages to send to markets.
However, his track record as a communicator has been criticised before.
The Governor has come under fire criticised for urging for restraint on pay rises, warning of “apocalyptic” food price rises and marching markets to the top of the hill only to disappoint on an interest rate rise last year.
Andrew Sentance, a former rate-setter at the Bank, says: “What we really need from the Bank of England is more prepared statements that take fully into account the impact on the financial markets and not just off the cuff comments, such as what we saw from Andrew Bailey last night, which has caused some confusion.
“When central bank governors speak, they need to do it quite carefully.”
He says there has been a “longstanding problem of communications” at the Bank, particularly since Bailey took over from Mark Carney at the start of the pandemic".
Perhaps more concerning for Bailey is whether he can even follow through with his ultimatum - and what happens to his credibility if he doesn’t.
The Bank will offer a new “repo” facility to help smooth the end of the gilt purchases this week, allowing pension schemes to solve their liquidity woes by parking bonds in the short-term in return for cash.
Continuing the bond purchases would raise questions for the Bank about moral hazard and whether the quantitative easing-style bond purchases are working against its efforts to reduce inflation.
But many in the City believe market turmoil in the coming days will leave the Bank with little choice, though it could return with a half-way house policy to placate markets.
Luke Bartholomew, senior economist at Abrdn, says: “Having to reverse course after such an explicit statement of intent is likely to end up further damaging the Bank’s standing with markets and efficacy of its communication.
“The risk is that volatility will persist and the Bank will be forced to intervene again.”
The gloomiest Bank watchers even think Bailey’s job could be on the line if he has to U-turn after making such a strong stand.
Danny Blanchflower, an ex Bank of England rate-setter and critic from the left, said his future is “now more in question”. He said on Twitter: “What if they have to step in again he looks like a fool again.”
