Ven Ram, Currency Strategist at Bloomberg answers three important questions: why the markets reacted the way they did, why the BoE had to intervene and why the sterling has declined by more than 24 per cent to the US dollar this year.
(Audio Interview – 2.20 min – please click the blue icon at the centre of the image)
Mini Budget or a Mini Meltdown
The gilts market of a developed economy like the UK is considered to be among the most liquid and tradable markets in the world, but market charts post the growth plan announcement indicated otherwise.
The benchmark long term bond UK-68 had already declined by 56.8 per cent this year, second only to Bitcoin, a very high risk asset which declined by 58.4 per cent.
Source: Bloomberg
Fortunately, the Bank of England intervened just in time to bail pension funds out with a life saving liquidity injection.
A BoE release acknowledged that if left unchecked, the market dysfunction would have resulted in a material risk to the UK’s financial stability and further tightened credit for households and businesses.
The markets will continue to keenly track the new government’s future actions and it remains to be seen to what extent the government would have to roll back its measures to regain the confidence of the markets.