Andrew Bailey is not for budging. The emergency gilt-buying scheme will end on Friday, says the governor of the Bank of England, and you’d better believe him. “You’ve got three days left now,” he warned pension funds on Tuesday evening, urging them to get their liquidity positions in order. And, in case anybody still doubted his determination, Threadneedle Street said the same again on Wednesday.
At this point, we must assume Bailey means it. If the Bank performed a U-turn on its gilts market operation, nobody would believe anything it said in future. So why has the governor chosen to go to war over a programme under which only relatively modest sums have been spent so far? And what happens if more mayhem breaks out in gilt markets next week when the Bank says it will be offside as a buyer?
The answer to the first question is the old one about the Bank not wanting to be seen to be diverting from its core mission to put a lid on inflation. Remember that a mere five days before the gilt-buying operation was announced on 28 September, the Bank had been planning to do the opposite and start selling a portion of its £875bn pile of government IOUs. The emergency diversion was like gorging on Mars Bars before starting a diet; yes, for the sake of seriousness, you want to keep the binge as brief as possible.
Up to a point, then, one can admire the determination to get back to the main inflation-fighting brief. An enormous problem arises, however, if markets freak out next week. As it is, the 30-year gilt yield hit 5% on Wednesday, the level that prompted the late-September intervention after Kwasi Kwarteng’s mini-budget. It returned to 4.8% later in the day, but is it really credible that the Bank would sit on the sidelines if, say, 5.5% was seen next week? How about 6%?
The pain would ricochet through to mortgage rates, corporate borrowing rates and much else. We’d soon be talking about the Bank’s other mandate to maintain financial stability. Therein lies the risk in Bailey’s tough stance: the danger that ending one form of emergency intervention creates the need for a bigger one.
A lot of faith is being placed in the new and snappily titled “temporary expanded collateral repo facility”, or TECRF, which was unveiled on Monday to address so-called “cliff edge” risk. It is a short-term funding mechanism that will cater for laggards in pension fund-land. Or, at least, the Bank hopes so.
Of course, the tale all comes back to the government’s unfunded tax cuts and plans for enormous borrowing – that is the source of the ructions and why more U-turns in Downing Street are desperately required.
Unfortunately for Bailey, Kwarteng’s next fiscal event is still two-and-a-half weeks away and, however unfairly, the Bank will have to deal with any financial accident along the way. Bailey is taking a gamble. Extending gilt-buying by a fortnight would have been the safety-first choice.
The de facto windfall tax
Don’t call it a windfall tax, says the business secretary, Jacob Rees-Mogg. OK, we’ll call it a de facto windfall tax because that is what it is.
The government’s new “cost-plus-revenue-limit” on renewable and nuclear generators is plainly an intervention that will result in the relevant projects making less profit than they would otherwise have done.
And quite right too. Under a system that was designed for the pre-renewables world of 25 years ago, electricity prices are set by the most expensive form of generation. It makes little sense to reward older wind, solar, biomass and nuclear generators for a surge in gas prices that has not affected their own input costs.
But – whatever the label – Rees-Mogg does need to get cracking with the details of his reform. The revenue limit needs to be decided, fair costs need to be defined and everybody needs to know what references to a post-crisis “normal” market mean. But the model, as far as one can tell, seems roughly along the lines of the EU’s revenue cap.
If that proves the case, corporate grumbles about a deterrent to investment in the UK should fade. After all, UK projects for the last few years have all been funded via contracts-for-difference, which are all untouched by the windfall-ish tax.
As long as the government fills in the details of the new measures quickly, the industry should move on.
