The Bank of England averts a crisis but only for a moment

There was an almost audible global sigh of relief on Wednesday after the Bank of England intervened in response to what was fast developing into a foreign exchange and bond market crisis in the UK; one that was also rippling through international equity, bond and currency markets.

Now that sell-down has been postponed for a fortnight and the bank has committed to buying UK government bonds “on whatever scale is necessary” to quiet the turbulent financial markets and avoid a financial crisis. It has resumed quantitative easing for a “time limited” period – a fortnight – despite the inflation rate.The yields on 30-year UK government bonds had soared through the 5 per cent level, about 1.

The more immediate issue confronting the UK’s central bank, however, was related to the soaring yields as investors fled the UK bond market. The bank noted the risks to UK financial stability from “dysfunction” in the gilt market. In the UK that potential problem has been exacerbated by the widespread use of leveraged derivative strategies that are used to effectively hedge their liabilities. The LDIs are estimated to represent about £1.5 trillion of assets or, as theThe collateral for those derivative positions is largely the funds’ fixed interest securities holdings.

UK’s monetary policy will be in direct conflict with the government’s fiscal policies, ensuring that the tightening of monetary policy will be greater than it would otherwise have been. Interest rates on home loans and business finance could be punitive if Truss and Kwarteng don’t back down or come up with some funding for their splurge.

The way the seizures in the UK markets spilled into international markets underscored how interconnected and fragile they are. A seemingly isolated “event” in one jurisdiction can quickly have ramifications elsewhere as global capital flows and strategies are abruptly disrupted.

Uk was already stuffed due to social welfare overspend!

and you thought putin was destructive

What are Bank of Wales, Bank of Scotland, and Bank of Northern Ireland doing?

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