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  • Writer's pictureEdgar Rayo

Finanze® Daily Digest - 12/10/2022

The Brief: Bank of England (BoE) Governor Andrew Bailey announced that the central bank has no plans of extending the gilt-buying programme after it expires on Friday. However, an earlier report from The Financial Times indicated that the BoE has “signalled privately to bankers” that an extension is most likely to be made. Since Monday, the BoE has been adding new measures to support its market intervention, which include the launch of a short-term funding facility, the increase in its daily bond-buying limit to £10 billion, and the inclusion of inflation-linked gilts in its purchases.

Why It Matters: The pound reacted swiftly upon Bailey’s staunch decision to rule out the possibility of extending the program. Sterling fell -0.4% against the dollar to $1.093 early today, then rose by as much as +0.8% to $1.1057 after reports of a possible programme extension spread.

Finanze® Foresights: The BoE is doing its duty of stemming any turmoil that will damage the financial market. After its programme expires this week, banks will have to resort to BoE’s short-term funding instead. Bailey’s decision is expected to send another shock to the markets, especially for bond holders who will feel the pressure when gilt yields start their upward trajectory again. But his earlier remarks shouldn’t come as a surprise even if he’s been criticised for not considering the possibility of an extension of its two-week purchase plan for long-dated bonds. In November 2021, Bailey spoke to Bloomberg TV and said, “I don’t think it’s our job to steer markets day by day and week by week.” This time around though, he has no choice but to steer the market. If the programme is extended beyond Friday, however, then this could buy time for many liability-driven investment managers to raise cash reserves and help pension funds meet margin calls. If not, then pension schemes will be heading for another round of massive liquidation, which will put gilt yields to higher levels. The higher gilt yields are, the higher mortgage rates for fixed and variable loans will be. This means that mortgage payments will eat up a larger portion of household’s real incomes, which have not kept pace with inflation this year.

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