LONDON, Oct 8 (Reuters) – Bank of England Governor Andrew Bailey said governments needed to double down on showing they can repair their public finances as bond markets around the world feel the strain of high levels of borrowing and rising inflation pressures.
“Whatever the stance of fiscal policy is, it must be credible and directed at stability, and to be seen to be such by markets,” Bailey said in a speech at a conference in Istanbul organised by Turkey’s central bank on Thursday.
Realistic commitments to rein in debt would help curb demands for higher returns from investors who hold government bonds when there are shocks like the outbreak of the Iran war, he said.
“In other words, such commitments are needed more than ever when these negative shocks occur,” Bailey said.
He also stressed the importance of central banks remaining focused on their job to bring down inflation.
While the 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.
In his speech, Bailey highlighted his concerns that bond markets had become more brittle.
“Greater absorption has come with greater fragility. Leveraged positions can be unwound rapidly. Losses can trigger margin calls, model-driven repricing and stop-outs, producing further forced selling that can amplify market moves, he said.
(Reporting by David Milliken and William Schomberg; editing by Suban Abdulla)
