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Credibility is returning to UK’s gilts, says Bank deputy governor

Britain is winning back credibility in the gilt markets but this still needs to be followed through with stable policymaking, a senior Bank of England rate-setter has said.

The fall in benchmark gilt yields after a series of policy changes — intended to regain market confidence after the government’s mini-budget last month — was a sign that the country was recovering its credibility, Sir Dave Ramsden, a deputy governor of the Bank, told MPs on the Treasury select committee.

“There is an old adage that credibility is hard-won and easily lost,” he said. “What we have seen when you look at yields in the gilts market is that credibility is being recovered . . . but that has to be followed-through.” He added that a “return” to stability in policymaking and the framing of fiscal events would be important to maintain credibility.

A sell-off of UK assets after the mini-budget pushed yields to highs not seen since the financial crisis of 2008. The yield on the benchmark ten-year gilt rose from 3.5 per cent the day before the mini-budget to a high of 4.5 per cent on September 27, while the 30-year bond rose above 5 per cent, up from 3.7 per cent in the same period.

Yields on the ten-year gilt fell to 3.8 per cent yesterday after the news that Rishi Sunak, the fiscally conservative former chancellor, would become prime minister. Yields on 30-year gilts dropped to 3.7 per cent.

The movements in gilt yields after the mini-budget were “very unusual”, Ramsden said. “Typically you’ll find UK yields are more driven by global factors. There is a clear break in the trend from the fiscal event on September 23. Our gilt yields at that benchmark for the ten-year point, and particularly for the 30-year point, went up sharply.”

Ramsden, who left the Treasury to join the monetary policy committee in 2017, was one of the three members of the committee to vote for an unprecedented 0.75-percentage-point rate rise in September. Most voted in favour of a 0.5-percentage-point rise to 2.25 per cent, where interest rates now stand.

“We’ve got back almost to where we started on gilts,” Ramsden said, “but to get back there you’ve had to have a whole sequence of policy announcements from the government. Meanwhile, we’ve had to do a very significant financial stability intervention to deal with the dysfunction that we were seeing in the long end of the gilts market.”

The Bank bought £19.3 billion of long-dated UK government bonds after the mini-budget to prevent a collapse in the pensions industry.

The central bank will be briefed by the Treasury ahead of the fiscal event expected on October 31, during which the government is expected to announce tax rises and spending cuts.

“We haven’t started the monetary policy committee round yet . . . but we have started putting the forecast together and we are already engaging with Treasury officials who are in turn engaging with the [Office for Budget Responsibility] on the elements which will go into the October 31 announcement,” Ramsden said.

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