Under normal circumstances, these circumstances would force the Bank of England to either raise interest rates more quickly or sell more of its bond holdings to do more to bring down the inflation it was already fighting. Become. Some analysts had expected the bank to announce an emergency rate hike early last week. Instead, the developing financial crisis forced banks to do the exact opposite, buying bonds to lower their borrowing costs.
Stimulating the economy by cutting interest rates is irrelevant, just a side effect, but some economists say these actions will only help central banks keep inflation under control if governments work together and don’t destabilize markets. It risks setting a dangerous precedent that policy can be tightened to control. How to threaten financial stability. In this situation, politicians take the lead when it comes to formulating economic policy.
French economist Guillaume Printemps studied the interaction between central banks and governmentslikened the dynamics to a game of chicken: either Mr Truss had to abandon his tax cut plans to avoid a financial crisis, or the Bank of England set aside efforts to raise borrowing costs, at least temporarily. As a result, “the Bank of England was forced to withdraw,” he said.
Policy makers have known for decades that when governments intervene to save private companies and individuals, they can encourage them to repeat the same risky behaviors in the future. This is a situation known as “moral hazard”. In the private sector, however, there are steps governments can take to offset these risks. For example, regulating banks to reduce the risk of bankruptcy, or wiping out shareholders if the government has to intervene.
It is less clear what monetary policymakers can do to prevent governments themselves from using the safety nets provided by central banks.
“There is moral hazard here. You are shielding some people from the full consequences of their actions,” said Donald Trump, former Fed vice chairman and former member of the Bank of England’s monetary policy committee. Cohn agreed that it was necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one of them was the prime minister of the government, the Ministry of Finance.”
Some forecasters warn that other central banks may have to backtrack on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will need to end its policy of reducing its holdings of Treasuries early.