Does the UK need an emergency rate hike?

Does the UK need an emergency rate hike?

Sterling’s crumbling and gilt is butchered after Britain’s embrace of trickle down splashback economy. At the time of Pixel, the cable costs around $1.09. FT Alphaville sincerely hopes everyone who hoped to travel abroad this year already did.

As UK markets go deep into the red, what’s a central banker to do?

ING’s Antoine Bouvet and Chris Turner reckon that quantitative easing, after getting the green light yesterday, is now dead in the water (our emphasis):

We have written extensively in the past that trading conditions in the gilt market require the BoE to tread very carefully when it comes to increasing the selling pressure that is already evident in gilt markets.

A number of indicators, from implied volatility to increasing bid-offer spreads, suggest that liquidity is drying up and market function is weakening. A signal from the BoE that it is willing to stop the sale of gilt will go a long way in restoring confidence in the market, especially if it wants to maximize its chances of fighting inflation with conventional tools such as interest rate hikes. The QT battle, in short, is not a battle worth fighting for the BoE.

But Deutsche Bank, which has argued Britain could stumble into a full-blown currency crisis, is pushing back against killing QT and is calling for the Bank of England to come out swinging.

Here’s DB’s George Saravelos this afternoon (our emphasis):

Both the pound and the gilt are experiencing historic falls today. We are surprised to read some market commentary in recent hours suggesting that the appropriate monetary policy response to this extreme market volatility is for the Bank of England to reverse its planned sale of gilts.

In our view, such a political reaction will make things worse. The market is sending very strong signals that it is no longer willing to finance the UK’s external deficit position with the current configuration of UK real interest rates and exchange rates. A monetary policy response to prevent bond selling will not only prevent the necessary rise in real interest rates to attract foreign buyers, but it will lead the central bank dangerously close to a path of fiscal dominance: a situation where decisions by the tax authorities (large fiscal spending) and their consequences (higher returns), dominate over the central bank’s primary inflation target.

In the light of this writer, the political response required to what is happening is clear: a big interest rate hike between meetings by the Bank of England as soon as next week to regain credibility in the market. And, a strong signal that it is willing to do “whatever it takes” to bring inflation down quickly and real yields into positive territory.

Cool cool cool. So, err, hands in the sky if you have that Friday feeling?


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