BOE’s Limited Options as Pound Caught in Crisis of Confidence
- The BOE will be forced to step in if gilt yields keep surging
- A large rate increase may be needed to reassure investors
With the UK having gone from an economy with a massive inflation problem to one facing a huge crisis of confidence, policy makers face a narrow set of options to dig themselves out of the morass they are in.
The Bank of England and Treasury will be hoping that the so-far outsized selling in gilts and the pound abates on its own. The pound has rebounded to around $1.0755 after plunging to $1.0350 earlier in Asian trading, but there seems to be little respite in the bond market. Two-year gilt yields have surged some 50 basis points to 4.45%, which means that the differential against the BOE’s policy rate -- which is now at 2.25% -- is more than 200 basis points. That may be thought of as a dipstick of how far behind the curve the policy rate is.