ALEX BRUMMER: The Bank should listen to the IMF’s advice on rates

Financial stability reports are all the rage since the great banking crisis of 2007-09. 

They are meant to gird market players against getting in over their heads – and put enforcers on alert for unexploded ordnance.

As we have seen in the UK liability-driven investments crisis, they can detonate even after warnings of danger.

Chain reaction: As derivative contracts unwound and lenders made margin calls the Bank of England, in its financial stability role, has been forced to take corrective action

In its global stability document, the International Monetary Fund (IMF) uses Britain’s recent experience as an example of what can happen when events come together to cause a calamity.

Unfunded tax cuts by Chancellor Kwasi Kwarteng together with already tense conditions in markets caused by the strength of the dollar (against all currencies) and surging interest rates set off a chain reaction that put 10m UK pensioners at risk.

As derivative contracts unwound and lenders made margin calls the Bank of England, in its financial stability role, has been forced to take corrective action.

The warning of a material threat to financial stability from Threadneedle Street is not terribly comforting.

Where the regulators were in this episode is still a big untold story. The same global factors, the strong dollar (see below) and the aggressive tightening of monetary policy by central banks, are now threatening the stability of the whole financial system.

Some 14 emerging market nations are on the brink or have defaulted.

The dollar surge has led at least five central banks to intervene or threaten to do so to stabilise their economies.

Some $60billion of assets has fled emerging market investment funds largely held in advanced countries. 

In China, 45 per cent of property development lending is in trouble. Rises in house prices, with Turkey and the US among the biggest surges, have put the residential property market in danger.

Thankfully, even though the UK has seen substantial increases, its housing market doesn’t appear to be on the danger list, given the big falls expected elsewhere.

So what to do? The IMF advice is for central banks to get the ordeal over speedily and not tarry in raising rates. Are you listening at the Bank of England?

And it suggests that fiscal policy ought to be supporting tighter monetary policy.

One trusts that is not another sideswipe at the UK’s more expansive approach?

Macho dollar

The last time the US dollar was as rampant as at present was in 1985, when Treasury Secretary James Baker convened the Plaza accord to knock down its value.

Moves this year have been equally violent, with the dollar 15 per cent up by against the euro, 10 per cent against the Chinese renminbi, 25 per cent against the yen and 20 per centagainst the pound.

As much as Americans love a strong dollar (it projects the image of a powerful country), it is not great for the majority of citizens who never leave the US. 

It has hurt blue-chip shares with international exposure, including much of the tech sector.

Morgan Stanley says it is not much good for growth and is particularly damaging to exports. In spite of this, the IMF cautions against intervention. 

It argues that foreign exchanges will right themselves when other central banks catch up with the US Federal Reserve’s aggressive rises in interest rates and have adjusted to meet the energy challenge behind the rise of inflation.

Maybe it will require a crisis in other bond markets – beyond Britain – to trigger co-ordinated action to end the potential harms to stability.

Closed shop

Those at the first in-person IMF and World Bank meetings since the pandemic are confronted with a very different place.

Hard copies of documents such as the World Economic Outlook report are banned, along with dozens of others, on climate change grounds. They are only online.

Perhaps the denizens here have never learned of the vast electricity capacity required to drive online activities. Facebook alone requires a couple of Hoover Dams.

Washington is a different place. Many of its most established restaurants such as Pesce, renowned for its locally caught fish, are permanently closed alongside the luxury emporium, the Georgetown Park mall, and the Mazza Gallerie, once home to the iconic Neiman Marcus department store.

In some ways, the US seems more damaged by Covid than Britain in spite of huge interventions by Donald Trump and Joe Biden. Curious!

This post first appeared on Dailymail.co.uk