Bailey Pulled a Blinder

issues with his other instrument Monday. But this is going to get tense perhaps. Yeah. So you've got both the Prime Minister and the Bank of England. There you have the sounds of investors, fund managers, analysts, everyone talking on Bloomberg over the last month, throughout the remarkable political and financial chaos we've all been witnessing. Of course, everyone's been questioning throughout all this the credibility of the Bank of England. So where are we now, guilt back to where they

were actually before Quasi Kwarteng's budget. Liz Trust of course did not survive as Prime Minister, but still sitting over the road from a here a Bloomberg HQ at the Bank of England is Governor Bailey. So We're going to ask the question this week, did Andrew Bailey in fact fuller blinder? I'm David Merritt. This is In the City, Bloombergs podcast, connecting you to these stories and the voices

of the heart of the city of London. You followers of France scenes Instagram or no, she's still in New York City in her Halloween costume, no less, but here with me in the London studio. I'm joined by Bloomberg reporter Phil Audrick and Bloomberg Television Economics and Government correspondent Lizzie Burton. Welcome Phil and Lizzie back to in the City.

But before we get going to discuss I just it's just been pointed out to me by my producer that the phrase pull a blinder is apparently not internationally recognized, and she's got an article about a t eight very British phrases that will confuse anybody who didn't grow up in Britain. So we're gonna have to define what we mean pull a blinder. Lizzie, can you have a go at defining what we mean by that? Pulled it out the hat? It was he was a walking comms crisis

and now he's shown how shown how it's done. There we go. So would you agree with that film that Andrew Bailey is now showing the world how it's done. Yeah. The handling of the ld I f s was pretty pretty impressive by the by the Bank of England. They used a market intervention tool that they never used before. It worked, It stabilized along into the guilt market. They've started quantitative tightening, so they're starting to sell guilts that they bought during the sort of easy years of after

the financial crisis that has never been tried before. Days after this near catastrophe and markets they're able to do this. So all of that would suggest that the Bank of England has has pulled a blinder here. I think that's I'm swelling with pride. What do you think, Lizzie de agree?

I mean, just throwing it back a bit. The reason that I think he pulled a blinder was because Andrew Bailey said that this emergency intervention to help out pension funds was only going to be temporary, and then you had the Chancellor at the time, Quasi quarteng saying that if the market termoil continued after the deadline, then that was a matter for the Bank of England, so a threat. And Andrew Bailey was really saying, get your act together, pension funds, and then what it really meant was get

your act together government. They seemed to liquidity improved and it made Quasi Quarteng look like he'd lost to Andrew Bailey in the end. Yeah, I mean that it all happened in Washington during the IMF meetings, and it was where it was. It was it was at the event where he where Bailey said, we are ending this temporary guilt bye program on Friday as planned. We've announced that we will be out by the end of this week.

You've got three days left. Now you've got to get this done, which was that was also when Quarting said I'm not going exactly and then and then literally the next day, Quarteing's pulled back to the UK, sacked on the Friday, and and the government then changes its fiscal policy,

which was what was unsettling markets. You spoke to speaking to bankers and investors in Washingtons big ancillary convention called the International Institution Cycle Finance Meetings, and they were all saying the problem is not not you know, necessarily what is happening in markets. The core of the problem was

the fiscal plan that was the mini budget. They have to deal with that, and Bailey did kind of give the government a very strict deadline to address this and they responded and of course it caused complete mayhem at the top of politics. And let's not forget what's so embarrassing for quarteng and Trust is that they spent the whole summer trashing the Bank of England and saying that the BOE didn't do enough to fight inflation, that it's

mandate needed reviewing. And then they before they you turned on the whole budget sack Quarte and Trust went as well. They had to go cap in hand to the BOE and say it's independence with sacrosanct and basically dropped the mandate reviews. It's just exhausting and I think people listening to this um will be you know, their heads are

spinning right like all of ours were tracking this. So just diving this back to where we when we all are sat down in the summer, the Tory leadership campaign was in midflow and as you said, Lizzie, sort of a lot of barbs are being thrown around. We discuss, didn't we how the bank was under attack by the Tory Party. The Bank of England persisted beyond any rational interpretation of the data to tell us that inflation was transient.

I think we need to look at the best practice around the world, the countries who have been most successful at controlling inflation, for example, the Bank of Japan. I think, Liz Trust use the phrase bean counters right about the people who are too obsessed with balancing the budget or maybe reining in inflation um And you know the bean counters, as we've now seen bit back, didn't they big time?

And there they had now won the argument. But could you just sort of spell us out a little bit for the listeners to explain how we got here right now? You know you mentioned Phil that the banks started tightening on the quantity the contract of tightening before anyone else, and then it had to do this emergency measure. But can we just give everyone a bit of a timeline. Liz Trust wins, She announces that mini budget with quasi quateng tell us talk us through what happened in the

next couple of weeks. Well, was the queen died? Of course, that was the integratory He had basically ten ten days of zero government and then uh and then and then literally just within a few days the mini budget was was out and um it was. The bizarre thing was that a lot of the mini budget had been trailed in advance, like thirty five billion of the forty billion

tax cuts was trailed in advanced. But the tone of the the tone of the statement, the fact that the Office for Budget Responsibilities, the chief being counters for the UK were not were not involved in this. So there was no sense of forecast uh, and there was there was there was no there was no watchdog who was just who act that the head first in quasi quatting did on becoming chancellor. So um, there was no one's

mark their homework. They pushed back and they've lost exactly And so Scholar really knew he had deep connections with the markets, he had deep knowledge of financial crisis, having been there during the two thousand and eight two thousand and nine financial crisis. And so they lose all this expertise and and they deliberately sideline the people who can

who can basically mark the government's homework. Um and uh, and of course the markets just suddenly here they get this the tone from Quarteng was like, we're going to be ambitious and we're pushing ahead. He completely ignored what was happening in global markets at the time, which was generally interest rates were rising, and the higher interest rates obviously increasing debt servicing costs, and so the sustainability of the public finances. You know, there's going to be questions

about it. There was apparently thirty billion of headroom. He spent the lot then went beyond it, and actually the real picture was probably that the thirty billion of headroom had shrunk because we were looking at recession and I are interesting say at the time, markets will do what they and exactly and so there's this kind of turning point at them Ani budget where everybody has seen, has listened to the words, and suddenly you see it written down that they don't care about the you know, these

these issues, and the market just literally just flips, completely flips, and you have you have these immediate that collapse in the power to record low like historic low ever and and this and this spike in government borrowing costs which caused complete catastrophe at this long end of the market, which blew up these ld I funds. That was the key thing, wasn't it. This is how you mentioned ld I just to explain it over means this is this

is the pension's market, right. The crisis in the pension's market was linked to the surge and boring costs the long dated UK government debt, And that's what really freaked everybody out, wasn't it. Yeah, because they had collateral demands, so that when huge collateral demands, so that when prices fell and yields rose to raise the necessary cash, they had to sell more guilts. It created a doom loop and it was all about the pace of this money floating out of the door, not really the level. And

that's what the Bank of England happened. That's when the banking woke up, right when the well, I should be fair. I'm sure they are awake all throughout right, but that's when they had to take really quite serious action. Remember, Phil, we were warned about the market reaction. We had Martin Real, the former Bow policymaker on Bloomberg TV, not a headline hunter. As Phil putt it uncounter. He utimate. He said there

was going to be a run on the pound. And this was the night before And I must say I expect the same sort of thing will happen with Fartean's policy, that they'll probably be all I wouldn't like to say when. They'll probably be a clear run on the pound, and then the Bank of England will be forced to put

up interest rates to stabilize the exchange rate. Much as and former Chancellor Philip Hammond came on, he said, the market is watching, the markets are looking very very closely at political pronouncements and the UK does face some serious headlings. He was encountering. They were all right right lining up

to warn everybody. Well, in the end we all know what happened, right, Liz Trust had to first of all fire her chancellor and then in the end her entire political project was in tatters and she to resign as well and became the shortest tenured prime minister in British history. Um, at the Bank of England, can you just explain a little bit more about what they had been through, because of course they were about to start quantitive tightening, and

that was the plan to start selling again. The vast reserves of UK bonds had built up nine billion pounds since the financial crisis. The first central bank to go ahead and do that, but then they had to suddenly reverse Veriot on that didn't they around to to save the pension's market. I mean, I remember on Bloomberg Television that day we were calling it quantitative confusion because we weren't sure which way they were going to turn. Can you give us a bit of insight what was going

on in the bank at that time? Well, I mean, so when we talk about barely playing a blind, I think I think you should distinguish into two periods. So there was the period of the immediate crisis after the mini budget, and I think that was dealt with, you know, a series of events that were pretty disastrous. They handled

it very well. Prior to that. They've had years again on top of areas of the market where they could see potential in stability and also to build proper functioning tools to fix markets when they absolutely need to in a crisis, and they and I'd say that they can. They failed quite considerably at that end, you know, in terms of the preparation, in terms of the in terms

of the oversight. It's the financial Stability Mandate, financial stop another financial crisis in COVID there was this dash for cash. Bailey has since in recent weeks conceded that that that what the bank did then was a two billion pounds quantity of easing a bond purchase, which was basically exactly the same as what they did after the ld I

crisis in the last few weeks. So they bought guilts off market participants directly, and that was presented as a as a quantitative easy mechanism back in the dash for cash days in at the start of the pandemic, because monetary policy had to be loosened at the same time, and so they were loosening monetary policy, so doing normal QUEI, but also at the same time it was serving a

market stability function. Now, they knew at the time that there would be there would be a day when interest rates were rising when QT was happening, so quie was being sold and they would get a market blow up, and the only thing that they could do would be to buy guilt. So they would effectively restart QUEE on a financial stability mechanism rather than a montary policy mechanism. And they knew this would cause vast confusion, but they

didn't get on top of this matter. And and I've been told that people senior policy makers in the bank were talking in sort of March around that time about them needing these two buckets. They needed to have blue queue and red QUEI and and blue QUEI would be normal monthly policy queie and red QUEI would be this financial stability mechanism. But the matrix right, which, so what are you gonna do? But they needed to communicate this,

They needed to tell everybody beforehand. They needed to design a tool, and they were talking about this, and there was there was no formal disclosure of all of what was going on. They didn't have a to Like they have other funitial stability tools, like they've changed the borrowing requirements for more mortgages to make it harder to worre they did a few years ago. They have these particular tools.

People know about them, and this one just was like, you know, the king of all financial stability tools go into the markets by guilt rescue everybody indiscriminately put the taxpayer at risk fundamentally, although it actually looks like with this l d I stuff, they're going to make a fortune. And but it hadn't been communicated and they didn't really

have have it properly set up. So in that respect, it was bad, but in the actual crisis they then just sort of unleashed everything they knew they were going to have to do, and they did it very well and the outcome has been to stabilize them. I mean, you know, thinking about the outcome right, even chaos behind the scenes. But you know, the market is back, as I said, guilt yields are back now at the long end of the curd, back down to where they were

before the Mini budget. You know, we've been talking a lot about what sort of permanent scarring is there in terms of the guilt market, in terms of London's reputation, in terms of the Bank of England. But isn't it the case now that things are sort of back to where they were and its business as usual. Well I did an interview with the Trade Secretary kemmy baden Ark which suggests to me that we're still a little bit perhaps in the trust era, because she was criticizing the

Office for Budget Responsibility. She said that it's forecasts are not always right. Yes, I do dispute the bas forecast because what happens with trade depends on the actions that I am my colleagues across government to take right now the o b R is probably making a forecast based on how we used to do things. They don't know how we're going to be doing things, so I think

we wait and see. We were talking about whether the o brs forecasts on Brexit mean that the Trade Department ought to reconsider the relationship with the EU, and she was referring back to her time as a Treasury minister. But really what's interesting about questioning the o b R at this moment, when we're about to have a budget on November the seventeenth again, is that she's kind of undermining its credibility by questioning its sums, just as Clarting

was doing with the BOE. Just as well. Mark Harney, the former BOE governor, said that the government was undermining the credibility of the UK's economic institutions. Soonac and Jeremy Hunt, the new Chancellor, are going to have to rely on the o BRES forecasts to get credibility and markets that they can balance the books. Are we to think that we can believe the o b R sums on growth

if we can't believe them on Brexit. I was in Washington when the day that Liz Trust resigned and there was a lot of kind of sympathetic faces around there, the people who have been covering the Trump White House and the sort of the chaos that we've been seeing it totally broken through in America and all around the world,

and they were saying, are you okay? You know with all this gus And there was a bit of a sense, wasn't there when Soona was anointed that maybe in for a period of calm here, maybe you know, we're back to a little bit more of a kind of nor Conserva approach and a little bit of the heat taken out debate. But what you're saying, is he is that you know, it's the same group of MPs, isn't it sitting in the Houses of Commons? And maybe sic priorities are not that much different to his his maybe his

two pre assessors, in fact, both both Trust and Boris Johnson. Well, everyone's penning their hopes on Richie Sunac. But um, I think you have to ask digg dig a little deeper. Let's go past his economics. Is he really a brexitter? I was wondering, is he just a brexitter? Because yeah, well you need to be a brexitor if you wanted to rise to the top of the Tory Party, get into power and make change in government. But speaking to people who say, look, he's an Atlantic sist, he went

to Stanford, he worked for Goldman. In his heart he believes in Brexit. Then think about the Rwanda policy. He's reappointed seller Bravernment as Home Secretary and we are to understand that he does believe in sending asylum seekers to Rwanda. Doesn't go down well with swades of the UK population green policy he demoted to climate ministers. He said he wasn't going to cop but well we've been on it. He said that he will. There we go. But nonetheless,

I think Alok Sharma is not attending cabinet. Here is a question mark over is green credential. I guess we know that he is. He is sort of fiscally conservative, so that much was clear during the Borough series where he had fights with with Boris Johnson about you know, paying for stuff. Cakism was not his economic strategy. But what we don't really know about him, as you're kind of a leading to, is his is his social and

his cultural vision for the UK. So we we've still got to learn who who Rishi is someone described that Jill Rutter at the Institute of Government. She said, it's not Singapore on Thames that he wants to create. Here is California on Thames. It's like, you know, we want to bring Silicon venture capital, spirit of entreprene neuralism to Britain.

That's his that's his kind of vision. Yeah, right, and you know in terms of how that spills over to the City of London, right, and his relationship with the Bank of England as well. What does that mean? I mean, I think he's talked about obviously boosting the city and I've got the Services Bill, the Financial Services but is

making its way through. You know. One thing that really struck my eye this week was this suggestion, and this has been a controversial amendment to that bill, that the government can override the city regulators if there's some what they would say as emergency reason, but really for any

reason that they seem deemed necessary. So again to this point about attacking the institutions of Britain or the City, the financial services, but in front of Parliament at the moment, if if the reports are true, is going to chip away at the independence of institutions like the f C A and presumably the Bank of England as well, and that's got to hurt as well in terms of global investors,

hasn't it. Some words from the Bank thing then said that at Mansion House last week that it would undermine the credibility if the city internationally, and well, you just you need to think about the offering of the city under Sounac if you're going to have all these tax rises as well, because the UK Finance was warning that London might be less competitive than Frankfurt and New York. But at the same time he and Jeremy Hunt need to balance the books. As they say, there are eyewateringly

difficult decisions to make. And if you I mean Sam whats the head of the Predational Regulation Authority the Thank of England, he U if we're going to I mean Richie is a pure Brexiteer because he obviously he backed he backed in twenty six and he's only just become an MP and at that point he was going against the government because the government was a remainer government under Cameron Um, so you know, he took an ideological position there.

And now you've got Brexit and what you don't have is we have have access to the financial services on the in Europe, and so they're not granting us equivalents. You can see his thing, King, We we need to be Singapore California in terms we need to deregulate, we need to take advantage of this. But of course, as the regulators point out, you need to have stables, really stable financial center. That is a prerequisite of a strong

a strong city. So there's this balance which he's obviously trying to strike, which the regulators think he's planning to go too far on, which is a sort of deregulatory drive to to boost growth using the city, which was kind of what happened in the eighties and the Thatcher with the Big Bang. And it's but I mean, you're not going to get a new Big Bang when everything has already been deregulated. So it's all, yeah, it's a it's a really tricky one to see how it's this

one's going to work out. And they're certainly going to go up against the institutions against to your point that this fight against our institutions is and over, Yeah, and so in that fight just to because back to where we started on this, you know, did the institutions managed to pull a blinder. We've seen Andrew Bailey ride out this storm has gone from the commons disasters, as you said, Lizzie, to actually outlasting that Prime Minister. I mean, so do

you see his um that project continue. You know we're going to hear from the we're recording this on on Wednesday. By the way, we had the Bank announcing what everyone's expected to be another three quarter point rate hike tomorrow. Potentially we might be nearing the peak of interest rates. Are things looking rosy next year? That is the bank

going to have an easier ride? I mean, if you if you take what's happening in the economy at face value, that there is going to be a natural um sort of squeezing out of inflation as people as we head into what is expected to be at least a shallow recession. Um. So, in terms of what the bank has to do, if we're already kind of having a having a recession, they

won't have to raise rates quite as aggressively. UM. But I imagine they're going to do a three quarter point rate rise now because they're kind of behind everyone this. The Bank went first on raising rates and then just sort of went at a more. It's gone first on QT. Yeah, but we criticized things slow. New Zealand. New Zealand is the only other bank doing it. They're they're they're not

one of the G seven. So the first major the banking is the first major one to be doing this active selling of guilts, which is which is proper sort of intervening again in the in the in the markets, which can dislocate things. But in that sense, Bailey's one because he's got back to what he wanted to inflation fighting and retooling. If there is another crisis, can the bank complete its plan for quantitative tightening over the next

five months. It really wants to start reducing that huge bank of guilts that our owns um This latest blow up came out of what you said, they should have expected it. But from their perspective, coming of nowhere, is it going to be able to complete that program and kind of complete its ark of the interest rates over the over the coming months. Andrew Haws at the Bank of England, he's the head of Markets, he's this massive brain.

He was saying that this l d I blow up and the pension fund crisis has obviously it's been sparked by right interest rates, and rising interest rates make pension funds natural buyers of guilts. So one of the bizarre kind of things that may be happening here is the rising interstrates are going to make are going to make pension funds more purchase more of the government debt that is issued. So can they get through this? Can they? Can they do the forty billion of active banking and

do forty billion active sales that they're planning. They're targeting it at the at the short end of the market where there is appetite and then and you potentially actually have these pension funds becoming more attracted to buying buying it because of rising interstrates. So they the first one got away really well. Then there was three points six

times cover. Um. You know, if if, if if the government doesn't issue masses of debt like you know, as was expected on the Quasi and co, then maybe there is there is the capacity to absorb it without without another blow. And so we're talking about the ultimate blinder, are we for the next year? Vainly, vairely the hero it saves the UK. Let's see what they do at the long end, because that's obviously where the market doing

well happen. We might hear more about that at the Bore Decision tomorrow or today when you're listening to this maybe Okay, thank you brilliant, Thank you so much for Lizzie Burson into Lordrick. Thanks for listening to this week's in the City. We will be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review and subscribe. This episode was hosted

by me David Merritt. It was produced by Summersadi and special thanks to for Lordrick and Lizzie Burden.