As inflation remains above the Bank of England two percent target, investors are questioning whether governor Andrew Bailey can deliver on his promise and effectively do his job.
Inflation currently sits at 8.7 percent which has spooked investors and prompted them to sell gilts as it’s much higher than the two percent target.
Mr Bailey is being blamed for failing to curb inflation and trying to use interest rate rises as a way of correction.
The Bank of England may have to intervene if last week’s chaos in the bond market persists, causing embarrassment for the governor.
In a bid to help curb this high inflation, the Bank has raised interest rates 12 consecutive times, however the constant raising could send further shockwaves through markets.
Experts warn that any further hikes in the base rate of 4.5 percent could break the pensions sector while heaping more pain on 1.3 million homeowners re-mortgaging this year.
Andrew Sentance, a former member of the Bank’s rate-setting committee, which sets interest rates said: “Bailey is not well-equipped to deal with the major monetary policy crisis that we have at the moment.
“We’re paying the price for the Bank’s slow action [and] they are not properly acknowledging their role.”
Tory MP and former Trade Minister Liam Fox said: “The Bank of England took their eye off the ball on inflation and maintained loose monetary conditions for too long.”
British inflation fell in April but by less than expected and it remains above the rate of price growth in the United States and most of Europe, putting pressure on the Bank of England to keep raising interest rates.
Traders expect a series of rate rises by the end of the year, taking the official cost of borrowing to 5.5 percent.
The Bank of England was forced to step in last autumn to save the pensions industry from collapse with the promise of a £65 billion package.
This followed an earlier episode of bond market turmoil after Liz Truss’s ill-fated mini-Budget.
This time the sell-off in gilts – UK government bonds or IOUs – is being put straight to Mr Bailey.
Althea Spinozzi, senior fixed income strategist at Saxo investment bank said: “The Bank of England has a big problem.
“It is clear that the financial system cannot take rates that high yet.”
The Government issues gilts to fund its borrowing. They are also seen as a measure of confidence in the economy. Traditionally, they have been considered one of the safest investments.
Ten-year gilt yields – a benchmark for Government borrowing costs – touched 4.42 per cent on Friday, within a whisker of their peak following the Truss mini-Budget last year that decimated pension funds.
The yield on three-month bonds is 4.8 percent, meaning that people can get paid more for locking up your money for three months than 10 years.
Normally it’s the other way around. When the market inverts like that, it could be a sign that it is pricing in a recession.
On theconversation.com, experts explained that the problem for pension funds in 2022 was the speed at which yields moved after the mini-budget, around 1.2 points in about four days.
Pension funds were using UK bonds as collateral on major market bets. When the value of that collateral fell so sharply, they faced margin calls from their lenders that meant they were in danger of losing their whole bets because they didn’t have the cash to make up the value of the collateral, which could have made them insolvent.
The Bank of England declined to comment on whether it would have to step in and bail out the pensions sector again if the recent turmoil continues.