Thursday, December 01, 2022

Dangerous ‘game of the chicken’: Truss reiterates its challenge to the market and threatens to take the Bank of England hostage


The new British government does not lend a hand to turn. Their intention is to aggressively reduce taxes at all costs. The shock seen in the markets these days is not enough for the Prime Minister. liz truss, and your cabinet contains the least amount of verbs. If criticism of the IMF, along with an emergency intervention by the Bank of England (BOE) this Wednesday, called for caution, the truce went ahead this Thursday assuring that it was not the time to back down and their path is “correct”. COBRA commits an act that threatens to compromise the BoE at most unless it ‘hostages’ the executive.

A simile may be what is known in English as chicken game hey ‘Chicken Game’, Beyond the game variations, the idea is that two players face each other until one of the chickens runs out. In its normal practice, two motorists are moving towards each other at full speed. The one who retires before he is afraid of the impact, he is defeated. Another approach is that two drivers are moving towards a cliff at full speed and whoever applies the brakes first loses the game. In this case, the truss government is moving quickly and leaves the BOE in a position to quit or continue the race.

Newcomers to Downing Street are determined to live up to their principle that comprehensive tax cuts are the solution to today’s ills. In his first public words, after the market slump these days and yesterday was capped by the BoE, Truss has insisted that higher taxes will only push Britain into recession., “I am very clear that the government has done the right thing,” he said in a round of interviews with local radio stations. BBC, “That’s the right plan.” “We are facing very difficult economic times, we are facing it globally. We have to take immediate measures to grow our economy and that means making controversial and difficult decisions,” he justified. .

It is important that while the truss does not modify its language, in the words of the Chancellor, half quartengGoing forward last weekend—though without specifying—more tax cuts without a clear funding plan Monday’s collapse of the pound and gilts British (sovereign bond). A dynamic that was already becoming apparent when Quarteng on Friday presented an emergency budget with the biggest decrease since the 1970s and markets showed their skepticism. Gaining a foothold in Downing Street, institutions such as Deutsche Bank issued a panorama warning if Truss was serious with his promises during an internal campaign at the Conservatives to replace Boris Johnson.

British political commentators have highlighted Truss’s smaller ‘waist’ than Johnson’s and each time he has been asked about the negative impact of his economic package, Truss has pointed to the extent of his government energy bills. Tried to divert attention from tax cuts. Help people this winter. He has repeatedly pointed to the global economic pressures caused by Russia’s invasion of Ukraine due to market turmoil. When asked about homeowners concerned about rising mortgage costs, he replied that the central bank is responsible for interest rate decisions.

“Markets are unwilling to trust the truss administration’s claims that it will achieve medium-term financial stability based solely on its word,” says Alan Monks, an economist at JPMorgan Chase in London. It would be very dangerous if the BoE continues to ‘fix’ the problem. And it’s starting to suggest a worrying background trend: an underground ‘rope’ with living beings.

What happened this week is irrefutable proof. After the Quarteng talks, the markets start trembling on Monday and the BoE has to come out with a lukewarm statement. This measure seems insufficient and it is added that there is no credible reform or promise from the government, which leads to more volatility in the market and leads to this Wednesday’s episode: ‘face to executive’ to buy BoE Save’ is the bond when the flight plan was already quantitative adjustment.

Fiscal dominance?

With the IMF wrapping up the recent truss government, former BoE governor Mark Carney joined the criticism on Thursday, accusing the truss government. “Weakening” the country’s economic institutionsThe first weeks of his administration saw the dismissal of a top Treasury official, criticism of the central bank over inflation and the apparent marginalization of the government’s fiscal watchdog, the Office of Budget Responsibility (OBR).

There are many authorized voices who show their concern about this dynamic in which the government drags along with its decisions. a central bank that includes independence in its mandate, It should be remembered that, in 1997, with the labor force gaining ground after decades, a law was passed in 1998 that gave the BoE operational independence in monetary policy: the body no longer operated under the Treasury’s design.

That freedom can now be compromised and some experts have defended the concept of fiscal dominance, “One of the great risks to the independence of central banks is fiscal dominance, which is the risk that the fiscal position of economies will pressure the central bank to deviate from its objectives, which will jeopardize price stability”, they said. Explain with CaixaBank Research Study Service.

In a note, ING analysts outlined their warning that a state of fiscal dominance would begin to emerge in the United Kingdom, with “Monetary policy is effectively determined by the Treasury”, “This is clearly a concern and the Treasury issued a statement on Monday saying it remains committed to independence from the BoE. This point is of concern only in the event of effective debt monetization, from actions such as bond purchases. is enacted. This Thursday is still far away,” he explains.

However, in another note to its research service, its economist Benjamin Schroeder believes the BoE may be forced to intervene longer and postpone its stimulus reversal roadmap during the pandemic. “There was clearly an aspect of financial stability in the decision to intervene in the bond market, but also financing, given Quarteng’s controversial emergency budget: the IMF’s warning against large and untargeted fiscal packages, and the fact that fiscal and monetary The importance of policies was not highlighted. Working together was unusually punctual given the challenge of inflation. There are some signs that the Treasury has supported in their plans,” he writes.

abrdn: “the market should listen to the government, not the central bank”

lvaro Anton Luna, the strategist for Spain and Portugal, believes that It is the truce government instead of BoE that has to fix the situation, “We do not believe the Bank of England should raise the emergency rate in the midst of monetary policy meetings scheduled at this time. The market remains concerned about the long-term financial stability of the UK sovereign government, and therefore the level of the currency, in light of the policy. And the rate at which the UK can borrow must be adjusted to this new set of circumstances. A hike in emergency rates at this time will only fuel the fear of those who see the UK as an emerging market economy, And in our view, this will only lead to the weakness of the currency.”

“As markets worry about the UK’s long-term financial stability and the erosion of institutional credibility, You need to listen to the government, not the central bank, You need to hear that this government is serious about fiscal stability and it will release the OBR forecast along with its new fiscal rules.”

Chris Smith, Jupiter’s investment director in the United Kingdom, says the priority is to restore confidence in the currency and that it can be done through “an embarrassing 180-degree turn in the government’s fiscal policies or announcement of serious spending cuts to reduce the projected budget.” Happens. Losses. According to experts, whatever will happen in the next few days, Interest rates will have to increase more than before To offset any additional inflation stemming from the government’s “loose fiscal policy” and the pound’s decline.

“Families were already facing significant inflationary pressures and the prospect of a recession. They now face the prospect of even higher borrowing costs and a material hit to household assets, which are likely to drive growth by the government. is contrary to purpose and has a cost-of-living crisis,” Smith concluded.


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