Financial stability risks will force the Bank of England governor into a U-turn

BoE governor Andrew Bailey’s insistence that emergency support will end on Friday is an unsustainable position that we expect to be reversed quickly. The muted sell-off in long end gilt yields this morning (30-year yields are up 27bps currently) already seems to be pricing-in a climb down and the extension of support.

What you will learn:

• Arguments against extending the emergency purchase of gilts centre around moral hazard and are as flawed today as they were in 2008. The investment strategies of UK pension funds are born out of necessity rather than excessive risk taking (albeit with questionable implementation) so it’s not clear that intervention by the central bank to help markets operate efficiently is inappropriate.
• If the BoE fails to calm the rise in gilt yields, this will add significant further downside risk to our forecast of a moderate UK recession. In that scenario, we expect tighter credit conditions would have a material impact on the housing market and wider business and consumer confidence.