Your editorial (The Guardian view on the global bond shock: Andy Burnham should take note, 1 September) implicitly suggests that the global bond shock will bring firmly into focus our government’s fiscal responsibility.
Fiscal responsibility is a precondition for avoiding a further rise in the UK’s cost of borrowing. Nevertheless, fiscal policy has to be considered together with monetary policy. In fact, the current rise in UK yields poses a huge challenge for the Bank of England’s policymakers, who will make their next decision on UK interest rates on 17 September. This is when the Bank’s monetary policy committee (MPC) will announce the amount of government bond sales (or quantitative tightening, QT) to be pursued over the next 12 months.
In a recent Bank of England staff working paper, co-authors and I found that QT policies add up to 0.4 percentage points to UK yields, but also reduce UK inflation by as much as 1.4 percentage points. Since QT policies increase UK yields over and above the impact coming from the ongoing global turmoil, the MPC is likely to slow down the current pace of £70bn in annual sales of government bonds.
Such a decision will relieve the ongoing pressure on UK borrowing costs, but it will also make it more difficult for UK inflation to revert quickly to the Bank’s 2% target. There are complicated trade-offs here that raise the issue of whether the government needs “to change … its relationship to the Bank of England”, as your editorial suggests.
Prof Costas Milas
University of Liverpool
