UK financial markets still not back to normal after mini fiscal turmoil, bank chief warns

Bank of England Governor Andrew Bailey said the UK bond markets are still suffering from the turmoil that followed the Truss government’s “mini-budget”.

“We have clearly had a period of high liquidity in the gold market, and at the moment it is no longer normal,” Bailey said against the House of Lords Committee on Economic Affairs.

He was speaking as the bank successfully sold £346 million worth of bonds, known as securities, that it had bought as part of the emergency relief following the financial crisis that the Truss-Kwarteng budget had triggered.

The governor said the lack of communication with the Treasury Department ahead of the September mini-budget made the process “extraordinary” and “abnormal”. He said he didn’t think Treasury officials knew what was going to be on the “tax return” even the day before it happened.

He also dismissed claims that he was the man who “overthrew the government” after the markets reacted badly to the budget and raised government borrowing costs, sparking a political crisis that Kwasi Kwarteng fired as chancellor and then Liz Truss filed resigned as prime minister after only 50 days in office.

Mr Bailey said no one at the bank knew what would be included on the disputed tax return.

“Under normal conditions, we have communication channels. This was not the case in this case,” he said.

“I didn’t tell the chancellor, ‘You have to tell me what this tax assessment notice says,’ because, frankly, I would never have told that to the chancellor. But I don’t need to say that under normal circumstances. We have communication channels.”

He said the deliberate dismissal from the Office of Budgetary Responsibility made it harder for the bank to prepare for what was to come next. “Ambiguity between [then] “The prime minister and the chancellor on what will actually be in the statement, I think illustrates the problem,” he said.

He described it as an “extraordinary” event and there was no official communication that usually happens before a tax return. Treasury officials who attended the bank’s monetary policy committee meeting the day before the mini-budget also knew little about its contents.

“I have no doubt that Treasury officials told the Bank of England everything they knew. . . I did not understand at all what was supposed to be said in this statement,” he said.

Financial markets were in turmoil after former Chancellor Kwasi Kwarteng announced more than £45bn of unfunded tax cuts. The pound sterling has fallen to one of the lowest levels in history and the cost of borrowing has risen.

With the looming financial crash in the bond market, the Bank of England has decided that an emergency intervention needs to be launched to buy up to £65 billion worth of UK government bonds to prevent further financial instability.

Bailey denied that he and his collegium were responsible for the former prime minister’s resignation.

The governor said the article that claims is based on a “false premise.”
“We didn’t overthrow the government,” he said. “We ran a limited operation for financial stability reasons, did the right thing and completed it immediately.”