Policy mission creep

Anthony Rayner

Premier Miton Macro Thematic Multi-Asset Team

Against a harsh economic backdrop, and in order to protect consumers, businesses, market participants and, ultimately, themselves, policy makers have become increasingly involved in areas that were previously left to the market.

Front of mind is the Bank of England’s recent intervention to purchase long dated gilts in order to stabilise the market. This decision was made in the midst of a number of crosswinds, as it was in part triggered by growth-orientated fiscal policy, i.e. the mini-budget, and is also happening at the same time as the Bank of England is tightening policy at the short end of the curve, in order to bring inflation under control. So, a number of targeted policies with somewhat conflicting objectives but, either way, it very much feels like yield curve control, which is a step towards more full scale intervention.

There is also the likelihood, not just in the UK, that the unwinding of previous interventions such as quantitative easing which have been planned for some time, in the form of quantitative tightening, will be put on hold.

Price caps and subsidies have become much more commonplace too, especially with energy costs moving significantly higher this year. Again, this is an attempt to protect consumers but on a number of levels it just pushes the pain further out and, in the meantime, exposes government bond markets to attack by bond vigilantes, if they perceive debt levels to be unsustainable.

Going forward, it will be amazing self-control if the UK government, faced with potentially materially lower house prices, will be able to resist introducing more housing schemes to avoid market reality taking hold, especially when faced with an election.

Further afield there have been increasing currency interventions. For example, Japan recently intervened for the first time since 1998 (when the Asian crisis triggered a yen sell-off) and South Korea has been intervening too, as well as raising interest rates to a 10 year high. The principal reason is to stop their currencies from continuing to weaken vs the US dollar, thereby trying to prevent higher import costs, especially energy, leading to higher inflation.

Indeed, the proximate cause of much of the market distress is higher energy costs and the related higher inflation and higher US interest rates. Controlling the energy price is outside the control of many policy makers, so they deal with the fallout instead. However, even if many policy makers have no influence on the oil price, intervention here is nothing new, with OPEC+ regularly trying to manage the price by adjusting supply.

Clearly, intervention is, in many cases, well-intentioned, for example to let markets clear and limit the impact of a distressed market on the broader economic environment. However, there will be unintended consequences, as well as intended consequences. For instance, there are increasing tensions between fiscal policy and monetary policy and the risk is that policy makers stretch themselves so much that they stretch their credibility. Credibility is in fact key, as markets look to take on policy makers in an increasingly distressed environment.

There are of course implications for financial markets too, as they become more unpredictable and more divorced from fundamentals. For all these reasons, we remain cautious but ready to change the shape of our portfolios if the environment warrants it.

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