Governments need to redouble efforts to restore confidence in their public finances, Bank of England Governor Andrew Bailey said on Thursday, as global bond markets come under pressure from high borrowing and rising inflation linked to the Iran war.
On a day when British government borrowing costs hit their highest in decades, part of a global bond selloff that has especially hammered France, Bailey said budget policies needed to be seen as credible to rein in investors’ demands for higher returns.
“Whatever the stance of fiscal policy is, it must be credible and directed at stability, and be seen to be such by markets. A continued commitment to the policy stance can then help to control the emergence of risk premia,” he said.
“Such commitments are needed more than ever,” Bailey, who normally avoids touching on fiscal policy, added in his speech at a conference in Istanbul organised by Turkiye’s central bank.
His comments come less than three weeks before finance minister John Healey delivers his first budget which is expected to be constrained by the rise in borrowing costs triggered by the conflict in the Gulf.
Bailey said the recent sharp moves in financial markets were “some way from normal” but they were not at the point of being stressed or reflecting illiquidity and overall the economy had been resilient to the energy price shock.
Bailey also said central banks had to remain focused on their job of bringing down inflation, echoing comments made earlier by BoE Chief Economist Huw Pill who noted too the backdrop of the financial market upheaval.
Bailey has so far voted with the majority of his fellow BoE policymakers to keep borrowing costs on hold, unlike their counterparts at the European Central Bank and the US Federal Reserve who have responded to the Iran war’s impact on energy prices by raising rates.
In his speech, Bailey repeated his view that evidence of any pass-through of higher energy prices to wider inflation in Britain remained “quite subdued” but “it’s early days, and the longer the pattern of higher energy prices persists, the more difficult this situation becomes.”
