Market volatility in the UK is forcing the Bank of England to act, and pressure to do so is growing. Because his alternatives are few and all involve risk, Governor Andrew Bailey has a problem.
Conservative legislators, former BOE officials, and City analysts have all called for immediate action to calm the market’s worries, but the central bank has stayed silent to date. Despite constantly monitoring the market, the institution has not yet decided whether to release a comment, according to a source with knowledge of the matter.
The simplest, short-term solution would be a statement of comfort to the markets and the nation from Bailey or the BOE, akin to what previous Governor Mark Carney said the morning after the Brexit vote in 2016.
That might happen as soon as Monday, according to Sky News. Such a declaration could be made verbally on television or in writing. Adam Posen, a former BOE policymaker, recommended the governor say “publicly by mid-week” that interest rates will rise if the value of the pound falls.
That might make an urgent rate increase possible. Calls for such a change started at the end of last week and have picked more steam since then. With the most recent increase occurring the day before Friday’s fiscal statement, the BOE has raised rates to 2.25% this year in an effort to curb inflation, but it has come under fire for not acting quickly enough.
By the BOE’s next meeting in November, the money markets now anticipate 200 basis points of rate rises, more than quadruple the amount of its previous increase. Bets of that level can indicate hedging against a move immediately. Another choice for the UK would be to personally intervene to support the pound. The task is made more challenging by the fact that the UK’s holdings of foreign currency are a tiny portion of the enormous stocks that may be required.
