Success of BoE’s measures to calm markets hangs in the balance

Highlights:

• Yesterday, the Bank of England (BoE) revived its bond-buying programme in an emergency move to protect pension funds. The move follows market turmoil after last week’s announcement of the new finance minister (Chancellor of the Exchequer) to cut taxes, implying a large rise in the government deficits over several years. 
• The BoE purchases are limited to above 20 years residual duration but principally unlimited in scale (but the BoE has indicated buying GBP 65 bn, i.e. 5 bn /day over 13 weekdays). The Bank’s press release noted the pur-chases could run until October 14. The BoE also said it would postpone the start of its bond selling programme of about GBP 80 bn/year, which had been due to begin next week. For the time being, it thereby de-facto accommodates the fiscal move. 
• This morning, PM Truss defended the tax cuts announcements from Chancellor Kwarteng, aiming at pushing the UK economy on a higher growth path. She is quoted as saying that "This is the right plan that we've set out". But the government will also stick to its plan to hold a fuller fiscal announcement on Nov. 23. The plan may contain laying out how to consolidate public finances, but Truss’ announcement suggests no taking back of the fiscal programme, at least in principle.
• We share the widespread criticism that currently expansionary fiscal policy is counterproductive to the efforts of central banks to tame inflation. However, it looks that the clash between fiscal expansion and monetary tightening will take more time to be resolved. This is a very unfortunate situation. As a consequence, markets will remain on alert, despite the central bank efforts to protect financial stability. The policy inconsistency may prove especially toxic for the pound amid the rising current account deficit. 
   

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