LONDON (Reuters Breakingviews) - No standing on ceremony for Andrew Bailey. Within a week of taking up his new job, the head of the Bank of England has slashed interest rates to a record low and announced more bond buying. Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde have done similar things in the past week. Their best efforts won’t fix one of the problems that is causing them headaches.
The UK central bank on Thursday cut the UK policy rate to 0.1% from 0.25% at an emergency meeting and said it would increase its holdings of UK government bonds and non-financial corporate bonds by 200 billion pounds, to a total of 645 billion pounds. These measures, like a bond-buying programme Lagarde unveiled a day earlier, are designed to protect the economy from the damaging effects of coronavirus-related disruptions. The Bank of England was, however, more specific about one of the problems perturbing policymakers around the world.
The BoE said financial conditions in Britain and elsewhere had tightened because of deteriorating government bond market conditions. In other words, holders of government debt have been trying to sell, which pushes up yields and therefore borrowing costs for large parts of the economy. Take the U.S. government bond market, supposed to be the most liquid in the world. The yield on 10-year U.S. notes rose as high as 1.28% on Thursday from 0.97% at the close of last week even though Powell unexpectedly eased policy on Sunday.
Such stimulus helps, but it doesn’t address the cause. A general shift into safe havens has in the past week turned into a desperate scramble for cash, and for dollars in particular. Investors large and small have been burnt. For example, some of Bridgewater Associates’ funds have posted double-digit losses so far this year, the hedge fund’s founder Ray Dalio said in a note sent to clients on Wednesday. Many investors are in liquidation mode, bailing out of even some safe or easily-saleable assets, traders told Breakingviews.
That creates another mess for monetary policymakers to mop up. Bailey, like his peers, is doing his best by throwing everything in the central bank toolkit at the problem. But until the panic selling stops, central bankers will be on the back foot.
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