Why did Treasury and Bank of England statements fail to reassure markets?

Kwasi Kwarteng. Credit: PA

The chancellor of the Exchequer and the governor of the Bank of England should now be pretty anxious.

Sterling has dropped by more than 2%, to $1.066 since they put out emergency statements that were supposed to reassure markets.

So what's going wrong?

Well, there are two reasons why the confidence of investors has not been restored.

First, it is never a good look for a central bank or a finance ministry to put out emergency statements in response to currency or interest rate movements. It looks panicky.

Which is why, this morning, I said I thought it likely the Bank would hold its nerve and say nothing about the need to raise interest rates till some kind of already-scheduled event or speech later this week.

Second, when making emergency statements, it's important that what's said actually changes perceptions. But the problem with both the Bank's and the Treasury's statements is each of them reinforced the idea that neither is serious enough about bearing down on inflation in the short term. How so?

Well the chancellor said only that public sector debt would be reduced over some unspecified "medium term" - which gives ample scope for it to continue to rise in a potentially unsustainable way for some years.

And the Bank of England also gave a very woolly statement about the imperative of "changing" interest rates to return inflation to the 2% target also "in the medium term", while welcoming the chancellor's "commitment to sustainable economic growth" - which is a Treasury aspiration still chronically short of empirical underpinnings.

So rather than the Bank playing its important traditional role of keeping the Treasury fiscally honest, the statements arouse the suspicion that Treasury and Bank of England are two drunks propping themselves up at the bar.

If they both wake up with sore heads, the hangover for the nation - a disproportionate rise in interest rates, repayment problems for borrowers, a possible housing slump - would be painful for all of us.

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