Bailey uses Istanbul speech to urge governments toward credible budgets

According to the text published by the BoE, Bailey said the financial system had come through three large supply shocks: Covid, Russia's invasion of Ukraine and the conflict in the Middle East. That resilience, he said, is not guaranteed. Government bond markets have so far absorbed sharp rises in yields, at the cost of greater fragility. Leveraged funds are increasingly replacing patient real-money investors, and those positions can unwind quickly.

According to a Reuters report carried by Investing.com, Bailey said fiscal policy, a subject he normally avoids, needs credibility more than ever. He described recent market moves as far from normal, but not yet stressed or illiquid. He judged the pass-through of energy prices to headline inflation to be limited, adding that the picture would get harder if energy prices stayed high. The same report quotes BoE chief economist Pill as saying central banks must keep their focus on inflation.

The speech came in a week when UK borrowing costs stood at multi-decade highs. FXStreet reports that the 30-year gilt yield rose above 6% on 1 October for the first time since 1998. Markets price an 83% chance of a 25 basis point BoE hike in November and 92% by December. Chancellor Healey presents a first budget on 28 October. Reuters also notes that Bailey has voted with the majority to hold rates.