The Bank of England has just announced that it is pausing in its quantitative tightening plans and at the same time it is going to buy some long-term gilts ‘to stabilize’ the market. Although the statement is coached in language that states that this is all temporary it is, on face value, nothing less than a complete u-turn.
What the Bank seems to be saying here is that the fight against inflation is too hard and too disruptive to be done. For equities this is, in the short run, good news, as the consistent rise in UK bond yields may be over for a while. Equities may be able have a sigh of relief, and given how oversold they are this sigh could be notable in size.
Longer term however this looks shocking. Is it really the case that a return to normal levels of interest rates is just ‘too hard’? That the cost of defeating inflation is just too painful? This seems to be what the Bank is saying. In the near-term equities will probably bounce on this. Longer term the credibility of the UK as a stable low inflation country, the sort of place where the central bank does the right thing, and where governments make difficult decisions, is being undermined as we speak. It all looks like the road to something a little third world in nature. It is also the case that the Bank of England is the first major central bank to blink – this is not a good look either. We suspect that this is a case of buy now and sell later.
by Paul Wood, CIO Woodhill Asset Management LLP