Bank of England Warns of “Self-Reinforcing ‘Fire Sale’ Dynamics” in the Financial Markets

Oct. 12, 2022 (EIRNS)—The Bank of England jumped in again on Oct. 11 with a new round of emergency bond-buying to try to stabilize what is clearly an out-of-control situation among pension funds, and more broadly in the financial markets. The BOE warned in a Tuesday public statement: “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to U.K. financial stability.”

The first emergency intervention of a sharp return to QE-type bond purchases came on Sept. 28. Then on Oct. 10 and 11 the BOE intervened again, increasing the limit for its daily gilt purchases—all the while swearing on a stack of derivatives contracts that they will end the purchases on Friday (Oct. 14), according to Bank of England Governor Andrew Bailey. The Bank of England further reassured the markets that, “as with the conventional gilt purchase operations, these additional index-linked gilt purchases will be time-limited and fully indemnified by HM Treasury.”

After this dubious Oct. 14 deadline (“we will take our foot off the gas pedal on Friday”), the Bank of England has announced that on Oct. 31 it will begin its delayed sale of gilts as part of a wider quantitative tightening (QT) effort (“we will slam down on the brakes on Oct. 31, promise”), along with similar moves by the Fed. The U.K. Monetary Policy Committee will not meet again until Nov. 3, after the QT is scheduled to start.

Market operators in the U.K. aren’t convinced. Krishna Guha, vice-chairman of Evercore ISI, said in a research note Monday night (Oct. 10): “We continue to think that the BOE likely will have to reschedule or reprofile the QT program it has promised to resume.”

Politico, in an article headlined “Liz Truss Panics as Markets Keep Plunging,” quotes a senior Whitehall official saying: “The PM is panicking and reaching for almost anything that she can do to calm the situation. She was so burnt by the fallout from mini-budget that anything that seemed bold, she now wants to massively trim back.” Politico adds that the Truss team is desperate to “give pension funds more time to raise cash and stop the so-called doom loop taking hold.”