This year "the October surprise" comes from the Bank of England [see photo].
The Bank of England put monetary policy at odds with the fiscal program of the Liz Truss led government. The new PM has a fiscal program focussed on expanding the national GDP. She proposed sensible tax cuts [up and down the scales] but, she had to walk back the relief for those who pay the top rates [this is because her backbench would not vote to pass that program as a whole]. Meanwhile, over at the Bank of England the mismanagement ramped up a notch as these incompetents had one foot on the throttle [quantitative easing] and another foot on the brakes [quantitative tightening].
But the Bank of England was not alone in its display of hubris, arrogance, and incompetence because the Pension Funds were right there too. Pension funds were caught with open positions once their interest rate derivatives positions were subject to margin calls [they had to pay to cover their losses as interest rates trends moved against their bets]. To meet their margin call commitments these Pension Funds were forced to sell at least some bonds. But they were trying to sell these bonds into an illiquid market place. So the Bank of England came to their rescue and began to sell bonds [quantitative easing] to boost the liquidity in the market. At this point the Bank of England was actually caught between "a rock and a hard place" because, in essence, it was at war with its own national government because the media blamed PM Truss for the fear in the financial markets and the falling pound sterling.
This needless war between the Bank of England and the incoming Liz Truss government came to a sudden peak with the sacking of the British Chancellor [who was recalled from Washington where he was attending an IMF meeting and proceeding with his fiducial responsibilities]. His dismissal was preceded by the declaration from the Bank of England that the Pension Funds had until Friday 14th October 2022 to clean up their act and settle their margin calls. This was a clear warning to global bond market that the Bank of England was retiring its policy of quantitative easing so the Pension Funds [and any others caught in this derivatives trap] were on their own.
The Bank of England is currently caught up in political crisis which could ultimately bring down the British government. It is rare to see a central bank act with such brazen arrogance and malice of forethought in ways that might lead to the end of the Liz Truss government. Will the Bank of England win this battle? The most likely answer is "YES" [given what we can see and what is being reported in the British media today].
BUT... If the Bank of England does go on to win this war then the future of the British economy is set to enter an unrelenting spiral of decline.
Richard.
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