Yahoo Finance Bank of England wasn’t fully briefed before Liz Truss’s disastrous mini-budget, Cunliffe reveals
The Bank of England's deputy governor for financial stability has told MPs that the central bank was not fully briefed about the contents of the unfunded £45bn mini-budget that caused market havoc last month.
Threadneedle Street is usually briefed confidentially by the Treasury ahead of a budget, so it knows what public spending announcements may affect monetary policy, Sir Jon Cunliffe told the Treasury Committee on Wednesday.
He also explained that the drop in UK bonds after the mini-budget was clearly caused by domestic factors.
"It’s fair to say there had been a general move of higher interest rates internationally," he said. "But while that was the backdrop, there is clearly a UK component to what happened after 23 September."
He told the chair of the Commons Treasury Committee, Mel Stride, that the BoE would have advised the government if it knew there would be such a dramatic knock-on effect on market stability.
"We did not have a full briefing of the package the night before," he said. "Had they asked us what the market reaction would be, we would have interacted with them. But it is not our responsibility to give the government advice on fiscal policy, it is the role of the Treasury."
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Responding to a question from Labour MP Rushanara Ali about how the mini-budget threatened financial stability, he said that yields rose "across the curve and particularly at the long end of the curve" after the fiscal event.
Cunliffe indicated that while its was difficult to predict how the markets would have reacted if they were briefed before, said one would know that borrowing costs would go up if investors lose confidence.
"If it’s unfunded — and we didn’t know to what extent it was funded or funded, and there was a growth plan that was intended to fund it through higher growth," he said. "But if the markets lose confidence in the fiscal credibiltiy, they will just increase the cost of borrowing."
The disastrous mini-budget caused a 'full-scale liquidation event' for pension funds, who were on the phone shouting to the Bank within two days of the announcement, MPs were told.
Andrew Hauser, the BoE’s executive director for markets, told the committee that the situation moved fast. "This was a situation that went from 'we’re ringing you to let you know; to shouting on the phone to us, within two days," he said.
Former chancellor Kwasi Kwarteng and prime minister Liz Truss unveiled a growth plan intended to reduce debt as a share of gross domestic product over the medium term, and unveiled the biggest set of tax giveaways in 50 years, which has since been ripped apart by Jeremy Hunt.
Cunliffe said that he expects the Bank will get a briefing ahead of chancellor hunt's medium-term plan on 31 October, especially as there will be an Office for Budget Responsibility forecast published then.
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The Bank launched a £65bn bond-buying scheme that ended on 14 October to calm markets and prevent a fire sale of government debt, with the intervention saving Britain from being on the brink of a financial crisis.
On Wednesday he told MPs that some of the investment funds that were providing asset liability matching services for pension funds started to have solvency risk as the price of long-dated gilts went down.
"They [funds] needed to restore their solvency ... most of them needed to sell gilts to restore solvency," Cunliffe said to MPs. "The problem is that it was a rising and thin market and as they sold gilts they drove the price down even further which affected their solvency, which meant they had to sell more gilts."
LDI, or liability-driven investment, is a popular product sold by asset managers to pension funds, using derivatives to help them "match" assets and liabilities so there is no risk of shortfall in money to pay pensioners. LDI was worth about £400bn in 2011, quadrupling to £1.6trn by 2021, according to the Investment Association.
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Cunliffe also raised worries over giving government ministers powers to veto rules written by independent financial regulators, which would be of "serious concern", he told Stride.
Such powers, which the finance ministry is due to propose, would affect perception of independence at the Bank's regulatory arm, he told lawmakers scrutinising the draft legislation for the financial services and market bill on Wednesday.
The Financial Services and Markets bill, which the Treasury department is due to propose, is meant to enable faster financial regulation for the UK after its departure from the European Union.
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