If one looks only at the pound, the governor of the Bank of England, Andrew Bailey, scored a small victory with his statement on Monday about not hesitating to raise interest rates. His line was little more than a weak holding position, but Tuesday’s action in currency markets was mostly calm during London trading hours.
Sterling was a shade under $1.08 against the dollar in late-afternoon – not good, but no worse than 24 hours earlier. Huw Pill, the Bank’s chief economist, even got through an arranged speech without upsetting the applecart any further.
The problem for Bailey, though, is threefold. First, currency markets never pause for breath: sub-$1.07 was seen at 6pm. Second, the next meeting of the Bank’s monetary policy committee (MPC), which sets interest rates, is not until 3 November, five weeks away. If the MPC is really disinclined to raise rates outside its normal policy-setting timetable, as Pill confirmed, that is a long time to be a hostage to events.
The third problem is the most serious: sterling isn’t the Bank’s main headache. The real throbbing pain is being delivered from the gilt markets, where Tuesday’s prices were alarming. The yield on 10-year government debt surged to 4.5%, having been 4.1% on Monday and 3.1% at the start of last week.
Those are extraordinary rapid rises and they feed directly into the cost of borrowing for households and companies. Witness the chaotic yanking of fixed-rate mortgage offers by many big high street lenders: the market is moving too fast for them to keep up. The 10-year gilt yield is now more than twice the equivalent borrowing cost for Germany as investors assess how far the Bank is behind the curve on inflation-fighting, and how hard it will have to hike.
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