Bailey Tells the Chancellor That Fiscal Policy Must Be Credible
Speaking in Istanbul as medium-term borrowing costs reached a nineteen-year high, the Bank of England governor said that “whatever the stance of fiscal policy, it must be credible and be seen as such by financial markets”. The ten-year gilt touched 5.515% by lunchtime, the highest since July 2007. Yields eased later in volatile trading.
Andrew Bailey added that realistic commitments to rein in debt “are needed more than ever when these negative shocks occur”, which in context is a message to one chancellor three weeks before one Budget. The twenty and thirty-year yields reached their highest since 1998 before retreating. The immediate trigger was oil: Brent rose more than 5% to $105.30 on the prospect of American strikes on Iran, and the inflation that implies is what the gilt market was pricing. Economists reckon roughly half of the £24bn buffer against the fiscal rules built by Rachel Reeves at the spring statement has been wiped out, and possibly significantly more. John Healey is expected to raise taxes on 28 October while also funding a six-month VAT cut on electricity bills and support for the poorest households. Andrew Wishart of Berenberg Bank argues against doing it mechanically: raising taxes merely to maintain headroom “would do unnecessary damage to economic incentives”. The round trip is the part worth holding on to. A market that can move the government’s borrowing costs to a nineteen-year high and most of the way back inside a single session is not delivering a verdict on British public finances; it is reacting to a war, and the Budget arrives whatever it does next.