Bank of England Governor also casts doubt on future rate cuts in UK, and plays down sharp rise in 30-year bond yields
The independence of central banks - a central tenet of global financial stability - has come under renewed threat in the, as President Donald Trump looks to influence the makeup and direction of the US Federal Reserve. Addressing the Treasury Select Committee yesterday, Bank of England Governor Andrew Bailey delivered a stark warning over this political interference, describing Trump’s recent attacks on the Fed’s autonomy as “a very serious situation” that could have global repercussions.
“I’m afraid I just think that is a very dangerous road to go down,” Bailey told MPs. “The job of an independent central bank is to provide those foundations, to take independent decisions to do it. That’s how it works, that’s how it should work. The threats that I take very seriously.”
Christine Lagarde, President of the European Central Bank, echoed Bailey’s concerns, warning that if US monetary policy were to become subject to political diktats, “the balance of the US economy – and consequently the impacts that has on the world as a whole, because it is the world’s largest economy – would be very worrying.”
Bailey’s warning comes at a time when UK financial markets are already facing considerable uncertainty. The Governor signalled to MPS that the outlook for interest rates is now much less predictable, with inflation proving stubborn and the Bank of England cautious about moving too soon on rate cuts. “There is considerably more doubt over the future path of interest rates,” Bailey said, indicating that the Bank is not yet ready to lower rates, despite mounting pressure from the mortgage sector.
Bailey also addressed recent volatility in the bond markets, where UK yields have climbed higher than those in France, despite France’s greater debt burden and political risks. He pointed out that the UK’s higher short-term rates - currently at 4%, compared to France’s 2% - are a key factor.
He noted that the steepening of yield curves is a global trend, with Germany and Japan seeing even sharper increases than the UK, while the US has experienced less pronounced moves. Bailey, however, cautioned against “over focusing” on the 30-year bond rate, which recently hit its highest level since 1998. “It’s a number that gets quoted a lot. It’s quite a high number. It is actually not a number that is being used for funding at all at the moment,” he explained.
Yield on 30-year UK government bonds
Bailey attributed the rise in long-term yields partly to structural changes, such as the closure of defined benefit pension schemes, which has reduced demand for long-dated bonds. “There is a lot of dramatic commentary on this but I wouldn’t exaggerate the 30-year bond rate,” he added.
Following Bailey’s comments, sterling strengthened against the US dollar, rising nearly half a cent to $1.343. The pound’s movement reflects market sentiment that interest rate cuts could be further off than previously expected, as traders absorb Bailey’s message that there is “considerably more doubt” about the timing of the next move. Meanwhile, the dollar has softened, down 0.3% against a basket of major currencies.
