U.K. plays blame game: Finance minister says Bank of England owns market turmoil

The ongoing liquidity crisis in the U.K. debt market is pitting the new government squarely against the central bank.

The BoE is still set to stop buying bonds to stabilize yields after Friday and Chancellor of the Exchequer Kwasi Kwarteng is pointing the finger at BoE Governor Andrew Bailey if yields take off again next week.

At the IMF annual meetings in Washington, Kwarteng told Sky News late Wednesday that any market turmoil as a result of the cessation of gilt support “would be a matter for the governor,” Bloomberg reported.

“The UK rates market continues to be a large contributor to volatility as the Bank of England tackles the ongoing fallout from monetary and fiscal policy working at cross purposes,” ING’s rates team said.

Pound sterling (NYSEARCA:FXB) is down slightly vs. the U.S. dollar, just below $1.11. The FTSE-100 (UKX) (NYSEARCA:EWU) is off 0.1%.

The BoE and Prime Minister Liz Truss’ government have been at odds over the mini-budget proposed, especially its unfunded tax cuts. The budget, which comes with cost-of-living support that would likely act as a stimulus, would make the BoE’s job of bringing down inflation that much tougher, especially as it tries to balance the need for sharp rate hikes at a time of economic contraction.

The standoff is also seen as a test of the BoE’s independence and credibility. Bailey surprised markets when he drew a line in the sand, reaffirming the Oct. 14 deadline and starkly warning leveraged pension fund managers they had just three days to adjust portfolios.

Yesterday, the BoE accepted all bids and bought 4.4 billion pounds in gilts, the most since it started its program on Sept. 28.

Until the government announces its medium-term fiscal strategy on Halloween, “then the BoE may well continue to play hard ball, at least to the extent that financial stability allows,” ING said.

With the deadline coming, “the 30Y gilt yield had indeed briefly climbed above 5%, the level reached before the BoE first started long-end gilt purchases, and only dropped back after the BoE accepted all bids in its daily buying operation,” they added. “The question remains whether two more days of BoE purchases will be enough to calm markets.”

Did Bailey make an all-time central bank gaffe?