UK Government and Bank of England Credibility Brings Parity into Play

It is the penultimate day of the Bank of England’s gilt purchase operations. The Bank of England intervened to ‘restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.’

However, on Tuesday, Bank of England Governor Andrew Bailey threw the markets into turmoil by affirming an end to the gilt purchase operations on Friday.

Speaking at the Institute of International Finance (IIF) Annual Membership Meeting in Washington, the BoE Governor said,

“We have announced that we will be out by the end of this week. We think the rebalancing must be done.”

Bailey went on to say,

“And my message to the funds involved and all the firms involved in managing those funds: You’ve got three days left now. You’ve got to get this done.”

Bailey’s comments have resonated and continue to influence market conditions. In response to rumors of the Bank of England considering an extension beyond this week, should market conditions demand it, Bailey reiterated the Bank’s position that operations would end tomorrow.

Lost Confidence in the UK Government Extends to the Bank of England

On Wednesday, British Prime Minister Lizz Truss ruled out a snap General Election by saying,

“I think the last we need is a General Election.”

However, Members of Parliament (MPs) will hold a debate on Monday despite the position on an election. Based on the latest YouGov polls, the Labor Party would get 52% of the vote and the Tories just 22%.

Fortunately for the British Prime Minister, there will be no vote at the end of the debate. However, history may not be on her side. The number of Tory Prime Ministers making the list of shortest-serving prime ministers in modern history is steadily increasing.

According to the Sky History Channel, Sir Alec Douglas-Home lasted one year and one day. Theresa May is the fifth shortest-serving PMI at three years, eleven days, and Boris Johnson is the seventh, serving three years, forty-four days.

While the markets may have become accustomed to political uncertainty during Boris Johnson’s tenure, market confidence in central banks is paramount for financial stability.

The Bank of England’s comments and the UK government’s fiscal hole may force the British PM to scale back fiscal measures further to balance the books. However, questions over the Bank of England’s credibility have also surfaced.

The timing could not be worse for the Bank of England, which could see its independence come under scrutiny. Before becoming Prime Minister, Liz Truss supported a review of the Bank of England’s mandate.

Uncertainty to Remain a Test for the Pound as Inflation Soars

This morning, the GBP/USD was down 0.11% to $1.10878, with the Pound falling back from an early high of $1.11204.

For the remainder of the week, the Bank of England’s position on the gilt purchase operations will be the focal point. However, the credibility of the UK government and the Bank of England could become other areas for consideration.

The Government’s mini-budget and the Bank of England’s interventions and guidance have driven Pound volatility and market uncertainty.

With the UK economy contracting in August and the threat of a snap General Election growing, fears of government meddling in the Bank’s rate-setting could see the Pound slide beyond September’s all-time low of $1.03437.