Watching the BOE wade in and calm the market led me to recall a powerful message from Raghuram Rajan, a former Reserve Bank of India governor, at a conference a year ago. Inflation was beginning to build around the world and central banks were contemplating how to begin ever-so-gently unwinding the vast sums pumped into the financial system during the pandemic. Was QE slated to return to the archives? Rajan was sceptical and told a panel that asset purchases were like “a whirlpool”, easy to fall into but far harder to escape.
Few in Britain may want to hear it, but the financial crisis that rocked the country has a silver lining for the rest of the world. The dramatic intervention by the Bank of England reminds us that quantitative easing, the large-scale bond buying commonly associated with low inflation rather than today’s price surge, is not going away.
What looked like a one-off exercise rooted in the traumas of 2008, Europe’s debt crisis a few years later and post-bubble Japan, continues to be rolled out. The UK is unlikely to be its last resurrection. The potential for a breakdown in the trading of US Treasuries is troubling top officials; Treasury Secretary Janet Yellen went public with her concerns last week when she fretted about adequate liquidity. The worst market rout in decades is not helped by the Federal Reserve’s efforts to unload a portion of the bonds it acquired during its Covid stimulus.
