Last week, I wrote here that 14 October was the key date in British politics, because the expiry of the Bank of England’s gilt-buying programme would force the Government to act to lower gilt yields. Be in no doubt: the sacking of Kwasi Kwarteng today is a consequence of the Bank’s refusal to go on supporting bond prices and artificially shielding the Government from the credibility-shredding consequences of the September fiscal statement.
That’s not to say the Bank planned or engineered this. I don’t think Andrew Bailey, the Governor, is a Machiavellian political strategist. It’s just to say that the nature of the UK’s economic and financial position is that the Bank’s decisions have huge political impact. And that impact is far from over. Here’s another date from the Bank that could prove politically pivotal: 31 October.
Liz Truss began her campaign for the Tory leadership promising radical reform of a central bank she said was failing
Everyone at Westminster knows that’s – nominally – the date for the next fiscal statement. Not enough people know that’s also the date that the Bank wants to start unwinding its quantitative easing policy, by selling some of the massive stock of bonds it bought over years of ‘extraordinary’ monetary policy.
This is quantitative tightening, and its aim is to raise effective interest rates across the economy. By increasing the supply of bonds, the Bank pushes down their prices and pushes up yields.
I’m sure I don’t need to explain the politics of higher borrowing costs right now. Given the circumstances, there are lots of City people who expect the Bank to delay the start of that QT operation.
Officially, the Bank remains committed to Halloween bond sales, but of course, the Governor can change that plan. No doubt he will do so thinking only of the economic context. But it is an unavoidable fact that the Bank of England is facing another decision with potentially dramatic consequences for the Government of the day.
It is also impossible here not to recall that Liz Truss began her campaign for the Tory leadership promising radical reform of a central bank she said was failing. That same bank’s decisions have helped cost her a chancellor, and this is a story that is far from over.
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