What is the lasting impact of Liz Truss and Kwasi Kwarteng’s mini-Budget? According to Andrew Bailey, the governor of the Bank of England, the big implications for monetary policy have come and gone. Speaking to the Treasury Select Committee this afternoon about the UK’s financial security, Bailey noted that the spike in both gilt yields and interest rate expectations last autumn have since fallen, with the former back to a ‘normal area of distribution’ and the latter having ‘seen correction’ as ‘new fixed mortgage rates’ have ‘come down.’
External member of the financial policy committee Jonathan Hall chimed in too, insisting that it ‘doesn’t look as though there was any sort of permanent damage done at the end of last year.’ This echoed the governor’s assessment that ‘we’re back to where we were…things restored to normal.’
Bailey and Hall’s comments reflect what The Spectator’s data hub has been tracking for months: market expectation for where interest rates will peak. Indeed, those predictions have fallen substantially since the mini-Budget was announced, from over 6 per cent right after the announcements, down to 4.4 per cent now (hovering right where expectations were days before Kwarteng’s announcements).
This relatively fast return to market stability won't give much comfort to those who locked in a higher fixed mortgage rate last year. But the Bank’s broader point about renewed financial security is reflected in the data, with global markets calming down as soon as new leadership entered Downing Street.
You could tell in today’s session that it brought Bailey all sorts of joy to mention this, voicing his hope, and confidence, that ‘a period of stable UK economic governance’ is now underway. But it’s a reminder, too, that the BoE is telling one side of not simply a story, but a feud, that played out between the governor and the Truss government. Truss started her campaign for leadership with veiled accusations about the BoE’s dovish attitude towards inflation and hiking interest rates. Bailey came back hard after Truss was out of No. 10, claiming to have been side-lined during the mini-Budget, to the point where the Bank was struggling to do its job.
With Bailey still in his post, and Truss out, he has more opportunities to write the history of how it all went — but not without some pushback. Today’s questioning around the pension fund fiasco reminded watchers that the Bank struggles to discuss the consequences of keeping interest rates so low for so long. The governor’s repeated insistence that all was well before the mini-Budget and the ‘massive spike in interest rates in late September’ that created 'unmanageable stress’ washes over just how sensitive the UK is now to historically normal interest rates. This addiction to cheap money was only exacerbated under the governor’s watch.
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