BoE working overtime to rein in inflation and calm bond markets

(Alliance News) - Another Bank of England bond market intervention, as well as a trio of economic data prints, underscored the challenges the central bank faces.

As if rampant inflation wasn't enough, the bank also is grappling with the UK's "financial stability", threatened by wild bond market moves.

The BoE, for the second day in a row, has attempted to restore order to the UK bond market.

The central bank has widened the scope of its bond-buying programme, due to end this week, to include purchases of index-linked gilts.

The move, the BoE said, serves as a "further backstop" as it bids to restore orderly market conditions.

"Fire sales" of UK government bonds, also known as gilts, are a "material risk to UK financial stability", it cautioned.

"All eyes today will be on how the gilt market will receive the new emergency measures by the BoE, with a specific focus on the results of a 30-year linker auction. The other major event to keep an eye on are the speeches by Jon Cunliffe and above all from BoE Governor Andrew Bailey at the IMF annual meeting in Washington," analysts at ING commented.

The pound has been beleaguered by the market turmoil.

Investor confidence in UK finances was shattered following Chancellor Kwasi Kwarteg's now infamous mini-budget announcement. The pound, already vulnerable to dollar strength due to a hawkish US Federal Reserve, suffered further and hit a record low of below USD1.04.

The low could be tested again before the year ends, ING predicts. The pound's current level, around USD1.1026, is "too high".

"Cable is pressing the 1.1000 support as we speak: we expect a decisive break below this level today or in the coming days, and currently target the 1.00-1.05 area for the pair into year-end," ING added.

Elsewhere, three data reports brought inflationary worries to the fore again.

Alongside UK unemployment data, which showed the jobless rate surprisingly faded to 3.5% in the three months to August, numbers showed pay growth continued to undershoot inflation.

Total pay, which includes bonuses, grew 6.0% annually over the three-month period, ticking up from 5.5% in the three months to July. Regular pay, excluding bonuses, rose 5.4%, accelerating from 5.2% growth. Pay failed to keep up pace with inflation, however.

In real terms - meaning adjusted for inflation - total pay fell by 2.4% and regular pay fell by 2.9%.

"February 1974 was the last time unemployment was as low as it is right now, but then that was also a time when inflation hit uncomfortably high levels that we can only hope stay as notes in the history books," AJ Bell analyst Danni Hewson commented.

"What does the jobs picture mean for growth and for the big economic announcements due to be made over the coming weeks? It means inflation is still front and centre and the Bank of England has little room to manoeuvre. Bring high prices under control and wages will stretch further but doing that is also likely to slow the very growth the government has set its sights on. The government continues to face a sizeable conundrum that affects us all."

Meanwhile, figures from the British Retail Consortium showed it was red-hot shop price inflation, rather than volumes, that led to retail sales expanding in September.

The BRC-KPMG report revealed that total retail sales increased by 2.2% in September, quickening slightly from 1% growth in August.

It was another month of "falling sales volumes" due to inflation, the BRC added, however.

And in a stark reading for UK grocery shoppers, latest data from Kantar showed UK supermarket price inflation hit 13.9% in September. It was a record high under the current methodology, which dates back to the 2008 financial crisis, Kantar said.

Analysts at Handelsbanken believe the Bank of England may be forced to take the foot off the gas, despite rampant inflation.

Markets are pricing in a base rate of 6% by the middle of next year.

"Base rates at this level would likely have a significant impact on the property market, leading us to believe that interest rates will peak at around 4% with the bank tolerating higher inflation for longer in order to reduce financial stability risks that would come about from a disorderly correction in the property market," Handelsbanken said.

By Eric Cunha; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.