Are central banks at war with markets?

As we saw once again at the height of the COVID-19 pandemic, central banks have generally assumed the role of ultimate saviour of the market in recent years – and for the most optimistic, of the economy overall. Yet recently, almost all have become opponents of the market and even of the consequences of their own actions! This may indicate that we are in for turbulent times on global stock markets.

The most recent example can be found with the UK central bank. Although it had been raising key rates – ahead of the European Central Bank and even the US Federal Reserve (Fed) – since the end of 2021, on 28 September, the Bank of England took everyone by surprise by announcing a programme to purchase GBP 65 billion (close to EUR 75 billion) of long-dated UK government bonds. Its aim is to counter the rise in long rates, whereas it had been preparing to deflate its balance sheet – a decision that has now been postponed. It is attempting to temper the extremely negative impact on rates provoked by the announcement of fiscal measures advocated by new Prime Minister Liz Truss. Truss has undermined market confidence with plans to massively increase government debt in order to finance protection for households against the rise in energy costs and to stimulate growth. Less incomings, more outgoings – a scenario unlikely to please the market. Sterling was bound to fall, which it did in spectacular fashion, plummeting to historic lows versus the dollar. The Bank of England backpedalled on its own policy of raising rates by pushing down long rates in order to try to restore market confidence. Yet rising rates are supposed to calm inflation, which is the government’s main target! The Bank is therefore throwing a spanner in its own works – already in a sorry state – and in those of the government, whose faltering it is supposed to be trying to remedy.

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