The Bank of England’s Blame Game

Bank of England Governor

Andrew Bailey

is trying to stabilize pension funds, which are caught on the shoals of questionable hedging strategies as the high water of loose monetary policy recedes. The bond purchases were announced when a spike in gilt yields after Sept. 23 threatened to force out-of-control bond selling by the funds.

The best that can be said of Monday’s policy tweak is that even if the BOE fills its higher quota this week, the total size of this intervention would be less than the £65 billion implied by the original announcement. The BOE is supposed to be tightening policy to fight inflation at 40-year highs and claims these emergency bond purchases aren’t at odds with its plans to let £80 billion of assets run off its balance sheet over the next year.

But BOE officials now seem confused about what they’re doing. If this was a lender-of-last-resort operation to provide liquidity and ensure smooth market functioning, is it still necessary?

Markets supposedly erupted after Prime Minister

Liz Truss

and Chancellor

Kwasi Kwarteng

on Sept. 23 announced a cut to the top marginal personal income tax rate, to 40% from 45%. That plan was the only surprise addition to a larger package of tax reductions. It also would only have reduced revenue by £2 billion, and has been withdrawn. If this truly was the cause of the market meltdown, the emergency should be over.

Instead, some at the bank now appear to be hinting this intervention is less about liquidity than targeting a specific interest rate for long-term gilts. The bank knew the intervention had worked when the yield for 30-year gilts fell one percentage point the day it was announced, Deputy Governor

Jon Cunliffe

wrote last week in a letter to Parliament. This is at odds with the bank’s stated intent to tighten monetary policy. No wonder markets doubt the BOE’s resolve on future interest-rate increases.

Undeterred, the bank is resorting to the familiar bureaucratic imperative for self-preservation. Mr. Cunliffe’s letter is at pains to blame Mr. Kwarteng’s fiscal plan for market ructions. His colleagues

Jonathan Haskel

and

Dave Ramsden

—all three are on the BOE’s policy-setting committee—have picked up the theme in speeches that blame market turbulence on a “U.K.-specific component.” This is code for Ms. Truss’s agenda.

While the bank plans to buy billions of pounds of bonds to soothe markets, bank leaders are poking the bears anew by telling them they’re right to fret about a fiscal package that may still pass Parliament. Never mind that the pension-fund hedging strategy at the heart of this mess was designed to protect funds from the bank’s own loose policies, and that allowing this strategy is a major failure by the financial-regulatory agency Mr. Bailey ran before he assumed his current job.

Central banks are under renewed political threat amid their near-universal failure to stem inflation. Ms. Truss has suggested the BOE’s mandate should be reviewed since the bank’s price-stability track record after 2008 is so poor. Mr. Bailey doesn’t help his credibility or the bank’s independence by politicizing the institution in the way he and his colleagues have over the past two weeks.