What, BOE Worry?
Submitted by Atlas Indicators Investment Advisors on September 30th, 2022
Our global economy is struggling. It started with the global pandemic. This led to uncertainty which forced leaders across the world to shut down economies. Then fiscal and monetary policies ensued as households needed support. Eventually things started to normalize but cash created out of thin air to support output remained in the system. This eventually led to inflation, inflation deemed transitory by America’s central bank. As it became evident that price gains were destined to stay longer than expected, the Federal Reserve and their counterparts around the world stepped in to help, hoping to usher in a soft-landing (i.e., slowing inflation without pushing the economy into recession).
Now we’re at the end of September 2022 and things are getting weird again. Markets (stock, bonds, and commodities) have been falling all month. So far, declines have been characterized as “orderly.” Perhaps under the cover of orderly, the new Prime Minister of the UK unveiled tax cuts which markets interpreted as inflationary. And then something odd happened. The British Pound took a pounding, falling versus other currencies. The move was swift and caused the Bank of England to step in.
Wednesday, the Bank of England (BOE) said it would purchase as many long-dated bonds as needed to restore order to the market. Wait. So things are turning disorderly? Perhaps. According to this Bloomberg article, the bank was worried collateral-related selling might cause panic in their markets. In other words, investors might be forced to sell in a way that would push bond prices down further quickly, causing rates to rise faster than desired, potentially setting off further selling.
The BOE has seen a business cycle or two. It is the world’s 8th oldest bank. Founded in 1692, they’ve also witnessed their fair share of crises. Watching them take emergency actions should be noted. Hopefully nothing serious actually materializes, but more evidence is needed before one can determine the global economy is in the clear.
