April 25, 2024

UK Market Disorder Could Nurture a Vicious Circle – France

The Governor of the French central bank, Francois Villeroy de Galhau, recently warned about the UK’s market crisis. He said the current turmoil reveals the fact that the government will be overwhelmed if it undermines monetary policies. De Galhau called the impending situation a vicious circle.

Policy Coordination

The central bank Governor emphasized the importance of collaborations between governments and central banks. He pointed to the increased interest rates in Britain after the failed mini-budget as an example.

Governor de Galhau spoke with the Financial Times. He said a monetary policy with an anti-inflationary position and doubts about fueling inflation might create a vicious circle. His statement emphasized the warning issued by the IMF head, Kristalina Georgieva.

Georgieva told newsmen last week that she discussed with the former UK Chancellor Kwarteng. She also spoke with the Governor of the Bank of England. She spoke about the importance of policy cooperation and clear communications.

She said her message to the authorities in the UK was not to extend the pain via tax cuts. That has the potential of pushing interest rates way higher.

Until Monday, the British government wanted to cut taxes by over £40 billion. In spite of the fact that inflation was at almost four decades high.

The Governor of the Bank of England, Andrew Bailey, opposed the move. He said it would make the central bank increase rates higher than planned.

Better Stock Performance

Governor de Galhau sits on the European Central Bank’s rate-setting committee. He equally stated that the UK’s chaos indicated vulnerabilities in non-banking sectors. He said there is, then, a need to have liquidity buffers.

Non-banking financial institutions are currency exchanges, insurance companies, and pawn shops. The Bank of England stepped in to save pensions from getting illiquid after bond yields increased.

De Galhau said global regulators should pronounce stricter rules for operation. It would make sure companies have a bigger cash reserve. Stress testing is equally a necessity.

Sky News reported that an asset management firm could have failed on Monday. That is if the government’s U-turn had not addressed the market jitters. If the interest on government bonds rose, it would have unloaded bonds quickly and collapsed.

Stocks indexes in the US opened higher on Monday. The better earnings and UK calm gave more confidence to investors.

The S&P 500 rose by 2.2% while the Dow added 2%. Nasdaq 100 rose by 2.2% also.

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