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BOE’s Bailey Briefed Reeves on Potential Reaction to UK Budget

By Tom Rees, Irina Anghel, and Francine Lacqua
Andrew Bailey, governor of the Bank of England (BOE), during the Monetary Policy Report news conference at the bank's headquarters in the City of London, UK, on Thursday, Nov. 7, 2024. The BOE cut borrowing costs for the second time this year, but stopped short of signaling faster easing, warning that the budget could drive up inflation by as much as half a percentage point. (Hollie Adams/Bloomberg)

(Bloomberg) -- Bank of England Governor Andrew Bailey briefed Chancellor Rachel Reeves ahead of the UK budget of a potential market reaction because of how investors were positioned.

Bailey said in an interview with Bloomberg TV on Thursday that he discussed financial markets with Reeves before and after the budget on Oct. 30, when she rattled investors with the biggest fiscal loosening in decades.

Reeves’ plans to ramp up borrowing to fund more public investment prompted a sell-off of gilts that pushed up UK bond yields. Investors scaled back bets on interest-rate cuts after Reeves stoked fears of her stimulus boosting inflation.

The market was positioned for short-end rates to fall and unwound those trades after the government unveiled its fiscal plans.

While the BOE on Thursday said the budget would lift inflation, the Monetary Policy Committee suggested that it would still stick to the steady but cautious path of rate cuts it was already on. 

Bailey said it was “reasonable to expect that markets will respond” to the budget and that it was an “orderly reaction.” He said that the investor wobble “wasn’t surprising to me” due to market positioning in the run-up to the fiscal event.

“[Reeves] asked me for my assessment of markets,” he said, adding that they

 spoke at the International Monetary Fund meetings in Washington last month. “As the Bank of England, we provide the Treasury with our assessment because it’s obviously something that we’re very close to.”

Asked whether he had discussed his assessment of markets with Reeves before the budget, he replied: “Both before and during actually.”

Bailey also said he worries about a more fragmented world economy after Donald Trump’s victory in the US election stoked fears of a renewed trade war.

Following a quarter-point cut of the base rate to 4.75%, he said that uncertainties both at home and abroad were contributing to the BOE’s “gradual” pace of easing.

He warned that the “fragmentation of the world economy is not a good thing,” adding that he supported Reeves in her advocating for free trade.

©2024 Bloomberg L.P.