The Bank of England’s chief economist compared last year’s UK market crisis caused by former Prime Minister Liz Truss to being by a river of crocodiles.
(Bloomberg) — The Bank of England’s chief economist compared last year’s UK market crisis caused by former Prime Minister Liz Truss to being by a river of crocodiles.
Huw Pill said the turmoil “was not a comfortable experience” for the central bank after Truss’s unorthodox plan for unfunded tax cuts spooked investors and forced the BOE to intervene in markets.
“That episode felt like we were by a river with lots of crocodiles in, and we were dipping our toe into the river,” Pill said on a panel in South Africa.
The remark was a vivid critique of the episode that triggered a plunge in the value of the pound and UK government bonds, triggering a funding crisis in one corner of the pensions industry. It required an intervention by the UK central bank.
Pill also noted the crisis put into question Britain’s institutions after the Truss administration froze out the UK’s fiscal watchdog, the Office for Budget Responsibility, from its usual role of overseeing major statements from the Treasury.
“The challenge in developed markets may be having hopefully built the right institutions, ensuring that the political process respects” them, he said.
“That episode was one where that organization, that institution, was cut out and I think brought into question the wider institutional structure within which macroeconomic policy in general, including monetary policy, operated,” Pill said.
Pill added to recent remarks by the BOE suggesting that it will leave interest rates at high levels for longer. On Thursday, he said he prefers a “Table Mountain” path for interest rates where policy is kept steady at restrictive levels rather than sharp hikes followed by rate cuts.
He said the combination of a tight labor market and workers wanting to catch up on wages eroded by inflation means the Monetary Policy Committee needs to be “particularly wary of allowing a dynamic to emerge that leads to persistence.”
However, he said the BOE takes comfort from longer-term inflation expectations being much better anchored compared to previous surges in prices in the 1970s and 1980s.
“That’s something we have to work on,” he said. “That anchoring of expectations doesn’t happen by accident. It happens because of the actions of the central bank and the commitment of the central bank to its inflation target.”
- BOE Chief Economist Favors ‘Table Mountain’ Path for Rates
(Updates with further comments from the appearance.)
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