Kwasi Kwarteng took time during last Friday’s mini-budget to reaffirm the Treasury’s commitment to an independent Bank of England, even though the chancellor's boss, new prime minister Liz Truss, had repeatedly attacked the Old Lady on her campaign trail this summer.
However, that same mini-budget sparked a mass sell-off in Gilts and clobbered the pound to an all-time low of $1.03, prompting the Bank of England to prop up the market.
It swooped in on Wednesday with a fresh round of long-dated Gilt buying — just as the UK wrapped up a syndicated re-opening of a 30 year green Gilt.
The impact was immediate. The yield of the tapped line fell by 70bp on the news, having hit 5% earlier in the day, according to bankers away from the deal.
Despite the turmoil, those in Numbers 10 and 11 show no signs of backtracking on their policies.
Buying Gilts is only one of the tools in the Bank's arsenal, although one of the most inflammatory. It plans to pay for the 13 day purchase spree of up to£65bnusing newly created reserves.
If the Bank has to keep buying bonds to stabilise the market and prop up the government’s policy, surely it will also have to push back the already delayed start of its quantitative tightening. Both steps, according to economics textbooks, will fuel inflation and make it even harder to meet for the Bank to hit its 2% inflation target.
Inflation is running at 9.9%, close to a 40 year high, and governor Andrew Bailey said on Monday that the Bank “will not hesitate to change interest rates by as much as needed to return inflation” to its medium term target. We presume he hasn't changed his mind, despite Wednesday's actions.
In most economies around the world there is always an underlying, slow-burn tension between those running fiscal and monetary policy. It is to be expected and is healthy. Up to a point.
In the UK, where the government is dead set on fiscal loosening while the central bank is determined to tighten, that tension has blown up into very public view. As one banker said this week: "It's like someone decided to put the brakes on and accelerate at the same time… it’s insane."
Something will have to give. It's hard to see the newly installed politicians backing down so soon in the job. So far they have been utterly deaf to criticism.
Instead, it is likely the Bank will have to give away further ground, and with it another piece of its independence. Just like its new round of Gilt purchases, the Bank will hope it is a temporary phenomenon.
But that is unlikely. Pushing the Bank's purchase operations out beyond the two weeks to the end of the year is surely inevitable — and entirely necessary, as markets are unlikely to calm down in just 14 days. Also inevitable is a further delay to starting Gilt sales — until much, much later in 2023 or even 2024, far enough over the horizon for investors to stop worrying about quantitative tightening.