Mixed messaging from the Bank of England (BoE) and a refusal by a leading government minister to accept blame for the ongoing financial turmoil added to investor confusion and has further damaged confidence in, and the credibility of, the central bank and the government.
The message from the BoE governor, Andrew Bailey, last night was at least crystal clear.
“My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done,” he said.
The pound unsurprisingly initially slumped although it has since recovered. Market analyst Neil Wilson at Markets.com described the comments as “strange”, creating “more of a hard stop mentality – cliff-edge – in the market, which can lead to more volatility.”
But wait.
In a sign that not everyone was singing from the same hymn sheet in Threadneedle Street, the Financial Times reported that officials at the central bank were privately reassuring lenders that it was prepared to extend its emergency bond-buying programme beyond Friday's deadline.
Only for the BoE to put out a further statement today confirming the gilts buying programme will end on 14 October.
"The Governor confirmed this position yesterday, and it has been made absolutely clear in contact with the banks at senior levels. Beyond 14 October, a number of facilities, including the new TECRF [the intervention made this week], are in place to ease liquidity pressures on LDIs" the bank said.
In financial markets, confidence and credibility are key to investors. To be fair to the BoE a lot of the problems they are dealing with are not of their making – the new government’s “mini-budget” has proved anything but mini, causing mayhem in the markets.
But this communications breakdown hasn’t helped anyone. Further, we appear to have a government and central bank in dispute as to what caused the distress in the markets in the first place rasing questions as to how joined-up they will be in their response.
Jacob Rees-Mogg, the business and energy secretary, claimed the BBC was breaching its impartiality guidelines by suggesting the financial market turmoil was linked to the government’s mini-budget.
He said there was no systemic problem and claimed the economy was in a “good state.”
He said the market turmoil was down to the fact that the interest rate differential between the US and UK had widened.
“It’s much more to do with interest rates than it is to do with a minor part of fiscal policy” putting him at odds with the BoE which has clearly linked the moves in the markets, to the government’s recent fiscal statement.
There is some credence to the argument regarding the mighty dollar which has advanced against all major currencies. Indeed, the BoE is not the only central bank to intervene in the markets.
The Bank of Japan was forced to prop up the yen with an intervention at the end of September for the first time since 1998.
The difference being that this came after the Bank of Japan stuck with its ultra-low interest rates, a major differential to the picture in the UK where rates are moving higher to deal with the impact of soaring inflation.
Rees-Mogg is clearly in the minority with his belief. Torsten Bell, chief executive of the Resolution Foundation, rubbished the suggestion. "It is very clear that there is a UK specific element to what is going on," he told the treasury select committee.
Rupert Harrison at Blackrock said of Ress-Mogg's words: “This kind of comment actively undermines the credibility of the government in the eyes of markets, who all know that it's total nonsense.”
Indeed this blinkered refusal to accept the reality of what is happening is adding to the credibility issues faced by the government.
With interest rates predicted to be heading to 6% in the UK economists are pointing out that the pound should be much higher.
Samuel Tombs, chief UK economist, at Pantheon Macroeconomics, estimated that sterling should be trading at $1.30, given expectations that the BoE will raise the bank rate to around 6% (higher than the US).
He suggested the current $0.20 shortfall from this level can be thought of as the cost inflicted on the economy by the government's reckless approach to fiscal policy, what he described as a credibility gap.
Wilson said “credible policy, trust in institutions (sacking the top civil servant) and belief in the Bank of England being able to contain everything have all been lost in the space of a couple of weeks.”
The Economist was even more savage on prime minister Liz Truss. It said Truss entered Downing Street on 6 September. “She blew up her own government with a package of unfunded tax cuts and energy-price guarantees on 23 September. Take away the ten days of mourning after the death of the queen, and she had seven days in control. That is the shelf-life of a lettuce.”
Credibility and trust are hard to earn and easy to lose. Whether this credibility deficit can be recouped remains to be seen.