Just reposting my Twitter thread from earlier on Friday for the benefit of those who don’t necessarily check in on social media too regularly:
THREAD: I really think the market's got the whole Gilt panic thing wrong. If you actually read the BoE market notice for this week's gilt purchases you will see this is not a conventional QE-style permanent asset purchase. It's much more akin to an Open Market Op or (OMO).
— Izabella Kaminska (@izakaminska) September 30, 2022
It continues thusly:
Before QE became normalised post 2008, OMOs were always standard practice for central banks hoping to reduce temporary market aberrations. What changed post 2008, is that these ops became permanent. Even then they were mostly still sterilised.
Nonetheless, de facto “permanent” asset purchases were mostly interpreted as money printing. I used to get annoyed by this, pointing out they were more of an asset swap. But over time I realised what i think is irrelevant.
If the market perceives it to be money printing it’s money printing. Even so, QE-style asset purchases were entirely driven by the zero bound. They were a function of cbanks not being able to stimulate the economy with rate cuts. This is clearly not what’s going on today.
What we have today is much closer to an open market operation. The clue is in the BoE’s market notice. Key words/phrases are temporary, targeted and “restore orderly market conditions”. This is not QE. This is an OMO:
This is why upon further reflection, what the cbank is doing is not bonkers or conflicting with a rate hiking regime. It is a mere function of intraday funding bottlenecks and plumbing issues.
The reason why the plumbing can’t handle these stresses easily, meanwhile, is because it is still structured around whole-day funding as opposed to real-time needs based. There is no Uber surge pricing mechanism, and there needs to be one.
It’s a shame the entire situation has been hijacked by politics and the British media’s incessant obsession with self-flagellation on all matters UK. I really think the signal was lost in the noise.
At first, I too got swept up in the hysteria and was inclined to go all in on the “end of Britain” narrative. Luckily, I had Neil Collins on the line in the thick of it to remind me that a bloodbath more often than not is a buying opportunity.
Frances Coppola has since come out with an equally aligned and thoughtful take that is worth your time.
Perma bear Albert Edwards, meanwhile, provides some worthwhile plumbing context which further supports the notion that it was a gilt market bottleneck issue that unnerved the pound more than the tax cut announcement.
Trash-talking Britain is easy. Coming up with better policy paths is hard. I’ve not seen much in the way of anything better.