Faisal Islam: Bank's tough love has consequences for Kwasi Kwarteng

Video caption, Bank boss tells the 大象传媒 it is doing 'everything' to ensure financial stability
  • Author, Faisal Islam
  • Role, Economics editor

The Governor of the Bank of England was crystal clear during his address to bankers in Washington DC. City funds that are part of pensions industry had three days of support from the Bank left.

Afterwards he spoke to the 大象传媒 and reiterated, unprompted, that there was an "important task now for the funds to ensure they are done鈥 they have got three days".

He very much meant it.

This "tough love" approach is designed to give those relevant funds in the pensions industry the strongest incentive to sell their positions, crystallising some losses, before the end of the week. But it has other consequences too.

The Bank has always given this timetable, and has put in place an alternative - more targeted - support system for those funds affected. But the sledgehammer approach of buying up long term government debt will end.

The Bank was never trying to prevent a fundamental repricing of UK debt to reflect new government spending plans, and a change in global interest rate conditions.

That is not its job. It was trying to prevent a fire sale and a spiral from that process of adjustment happening with record speed, in the days after the mini-budget.

So this also has the affect of taking the lid off the effective government borrowing costs, or yields, which just reached for 20-year loans a 20-year high of 5.14%, above the post mini-budget highs.

Kwarteng markets showdown

That, and a shock fall in new figures on UK economic growth, was what greeted Chancellor Kwasi Kwarteng as he touched down for his debut on the international stage here in Washington.

If anyone in government was in any doubt ahead of the economic plan on 31 October where the chancellor will explain how he will pay for the tax cuts he has outlined , there will be no repeat of what has happened at previous periods of emergency high borrowing - the Bank of England gobbling up government debts.

The government will have to face the markets, and the consequences of their decisions, trade-offs and rhetoric over tax, spend and borrowing.

And the chancellor may be in for a shock here at the IMF, if he really believes that the turmoil is unconnected to the mini-budget. At the gathering of the world's top bank bosses here, Andrew Bailey was thanked for his leadership in this "crisis", and he publicly reiterated the "UK-specific factors" at work.

An economically credible and politically viable debt plan is needed quickly, and it's going to be a rough run-up to Halloween.