Key facts
- Governments must demonstrate credible commitments to fiscal stability and debt reduction, according to BoE Governor Andrew Bailey.
- Bailey stated that such commitments are crucial for curbing investor demands for higher returns on government bonds during negative shocks.
- Recent sharp moves in financial markets were described as 'some way from normal' but not stressed or illiquid.
- British government bond yields reached multi-decade highs on Thursday.
Bank of England Governor Andrew Bailey stated that governments must demonstrate credible commitments to fiscal stability and debt reduction, especially amid global market strains from high borrowing and inflation. He emphasized that such commitments are crucial for curbing investor demands for higher returns on government bonds during negative shocks.
Speaking at a conference in Istanbul on Thursday, Bailey said that whatever the stance of fiscal policy, it must be credible and directed at stability, and be seen as such by markets. He added that realistic commitments to rein in debt would help curb demands for higher returns from investors when shocks like the outbreak of the Iran war occur.
Bailey also stressed the importance of central banks remaining focused on their job to bring down inflation. He noted that while recent sharp moves in financial markets were "some way from normal," they were not at the point of being stressed or reflecting illiquidity. British government bond yields hit their highest in decades earlier on Thursday as part of a global selloff triggered by another lurch higher in oil prices. Bailey highlighted his concerns that bond markets had become more brittle, with greater absorption coming with greater fragility, leading to leveraged positions being unwound rapidly and losses triggering margin calls and further forced selling.