The Bank of England forced to intervene again to calm the markets

When he was prime minister (2019-2022), the Conservative Boris Johnson gave Liz Truss a nickname: “The human grenade. » Now that she has replaced him at the head of the British Government, the new prime minister seems to justify this mandate. Since the presentation of her budget on 23 September, which announced the biggest tax cut since 1972, the British financial markets seem to have been hit by an explosion that is not without its damage.

Read our explanations: Article reserved for our subscribers Why is the UK economy in a panic?

On Tuesday, October 11, the Bank of England (BoE) announced an extension of its emergency intervention, two weeks after starting it. His concern refers to the bond market, where volatility and tensions remain very strong, increasingly affecting the darkest corners of financial products. “The dysfunction of this market and the risk of a dynamic sell-off pose a serious risk to the financial stability of the United Kingdom”explains the central bank.

The initial explosion dates back to the budget announcement. By presenting tax cuts equal to 1.5% of gross domestic product, without explaining how to finance this gift, the government has caused the start of a financial panic. UK 10-year bonds rose from 3.1% to 4.6% in ten days, a highly unusual move in these markets. “Fundamental problems are piling up in the UKsays Antoine Bouvet, interest rate strategist at Dutch bank ING. There is the budget deficit, but also the current account deficit and runaway inflation [à 10 %]. Everything pushes for a rate hike. »

“Intervention too short”

This economic problem then contaminated the financial markets, destabilizing pension funds in particular. For the last twenty years, they have been buying financial products (“interest rate swaps”) that pay when interest rates fall. As long as inflation was low and rates remained historically low, all was well. The sudden reversal of the market with the great return of inflation for a year has caused losses, forcing them to find liquidity quickly.

Pension funds are forced to sell their assets in a hurry, amplifying the financial panic. In this context, the pound sterling reached, on September 26, the lowest level in its multicentennial history against the dollar, at 1.035. Two days later, the BoE tried to stop the snowball effect. It announced that it would buy UK bonds again for a short time, until October 14. The pension funds could thus find a buyer as a last resort, if necessary.

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