Les leçons de Londres
- No costless political solution for the UK government now – putting the BOE in a delicate position.
- The UK experiment suggests markets have no patience with “supply-side miracles” and “growth dividends” narratives.
- We don’t think QE resumption would be a “go to” solution elsewhere in case of liquidity accidents, but the ECB may think twice about launching QT early.
The Bank of England has bought the government some time to re-think its plans, but volatility is likely to remain high. Reassuring markets by curbing spending to offset the permanent tax cuts is the government’s preferred course, but the political cost would be large. Funding the immediate relief package with a windfall tax on energy companies, or reversing the tax cuts are other options, but they also come with a potential cost in terms of political stability. There is a distinct risk the BOE is forced to intervene beyond 14 October. This would be another step into fiscal dominance. Action was unavoidable with a systemic crisis emerging in the UK pension industry but choosing bond purchases rather than channelling liquidity to pension funds - although operationally expedient – puts the Bank of England in a delicate position as it blurs the limits between pursuing financial stability and monetary policy.
We can draw some early lessons from the “British experiment”. As much as the market is still willing to look through the immediate fiscal cost of mitigating the energy price shock, there is no patience with governments embarking on large permanent tax cuts, and investors have very little time for “supply-side miracles” and “growth dividends” narratives in a context of rising interest rates. We have seen a flurry of comments presenting the BOE action as a harbinger of things to come across the G7. We are not convinced. True, financial accidents are likely in times of rapidly rising market interest rates but considering that a resumption of QE would be the “go to” solution misses the crucial point that a conflict of objective has now appeared. Pure liquidity solutions would probably be preferred. Where however the British experiment could contribute to alter the course of central banks it’s on the risk of launching Quantitative Tightening too early. The Bank of Spain has sent a clear warning to the ECB on this issue, albeit from a different angle. The probability of a QT announcement in October already has diminished in our view.
In the US – where we will focus on payroll this week – we note that Lael Brainard has mentioned the risk of the Fed “going too far” … although it’s probably not for immediate consumption.