Bank of England governor is paying close attention to international financial market situation

The market is still expecting the Bank of England to start violent interest rate hikes. However, analysts at Barclays and UBS both believe the Bank of England will not do so. Prime Minister Truss will hold emergency talks on Friday with the head of Britain's Office for Budget Responsibility (OBR), after she failed to calm panic in financial markets and garner support from Conservative MPs for her aggressive economic plan.

Bank of England Governor Bailey said in a statement that he is closely monitoring the situation in financial markets. Policymakers will assess the fall in sterling and the impact of the UK government's fiscal plan at the next monetary policy meeting in November, and will not hesitate to change interest rates if needed to bring inflation back to a sustainable level over the medium term. to the 2% target.

Some in the market were already calling for urgent action by the Bank of England to stem the trend, but it was an unprecedented move in modern times that could fuel a sense of panic. Former U.S. Treasury Secretary and Harvard professor Summers bluntly said that Truss's leadership of the cabinet was "naive" and "created the conditions" for the pound to fall to parity with the dollar.

The Bank of England is showing creativity and willingness to deal with frantic markets. The rise in sterling brought about by the Bank of England's move is unsustainable. Anytime the central bank plans to interim intervention, the market will definitely test this to see if the central bank will continue to do so. But the market does not expect the pound to fall below parity with the dollar.

TD Securities foreign exchange analyst McCormick warned that the current exchange rate level of the pound may be overvalued by more than 20%, which means that the pound has room to fall further; according to budget forecasts, the UK will borrow 20% of GDP this year and next. 6.5%, plus 7% over the next three years, that means the pound needs to fall by around 20% to reach a new balance.

From April to July this year, the UK inflation rate hit a record high in 40 years. In August, the UK consumer price index rose 9.9% year-on-year, still at a 40-year high. In order to curb high inflation, the Bank of England announced on September 22 that it would raise the benchmark interest rate from 1.75% to 2.25%. This is the seventh time since December last year that the Bank of England has raised interest rates.

Joe Perry, a senior analyst at GAIN Group, said that under the unexpected intervention of the Bank of England, the yield of 30-year gilt-edge bonds fell by more than 100BP, and the pound closed more than 150 points higher against the dollar. Therefore, the central bank's move may work in the short term; in the long run, the intervention of the Bank of England may not be sustainable, and the pound may eventually fall to parity or below parity against the dollar.

The Bank of England's bailout may temporarily ease the upward pressure and sentiment on the yields of government bonds in the United Kingdom, the United States and other countries around the world. It has never been seen that the way the central banks of major developed economies raise interest rates will still bring pressure on the bond and foreign exchange markets. If the UK and the European Central Bank also actively tighten in the fourth quarter of this year, the weakening of short-term arbitrage factors can ease the pressure on the global financial market from the rise of the US dollar index, but at the same time, due to the rise in interest rates in these economies, it will also bring risks of cross-border capital flows.

The government's tax cuts are aimed at supporting economic growth, but investors are concerned about the government's fiscal prudence and sound monetary policy as the program relies on a large amount of government debt and borrowing costs have risen sharply, said Victoria Shorer, head of investment at British Interactive Investments. Thoughtless. In addition, the policy does not take into account the negative impact of the current high level of inflation in the UK.