The Daily Telegraph

Bank of France chief says UK’S ‘vicious loop’ was inevitable

- By Eir Nolsøe

‘If there are doubts about whether your fiscal policy will fuel inflation, you risk nurturing a vicious loop’

THE head of France’s central bank has warned that market upheaval in the UK shows how government­s can be overwhelme­d by a “vicious loop” if they undermine monetary policy.

François Villeroy de Galhau said the surge in Britain’s borrowing costs after Liz Truss’s disastrous mini-budget reinforces the importance of consistenc­y between government and central bank measures.

The governor of the Banque de France told the Financial Times: “If you have a monetary policy with an antiinflat­ionary stance and there are doubts about whether your fiscal policy will fuel inflation, then you really risk nurturing a vicious loop.”

His comments echo warnings by the head of the Internatio­nal Monetary fund, Kristalina Georgieva. Last week she discussed the need for “policy coherence and communicat­ing clearly” with the then chancellor Kwasi Kwarteng and Andrew Bailey, the Governor of the Bank of England. Her message was “don’t prolong the pain through uncosted tax cuts”.

Until Monday, the Government planned to slash taxes by more than £40bn, despite inflation edging towards a 40-year high. Mr Bailey had warned that this would force the Bank to raise interest rates higher than would otherwise be needed.

Mr Villeroy de Galhau, who sits on the rate-setting committee of the European Central Bank, also cautioned that the UK turmoil pointed to vulnerabil­ities in the non-bank sector and the need for liquidity buffers. Non-bank financial institutio­ns include insurance firms, currency exchanges and pawn shops.

Global regulators at the Financial Stability Board should announce “clearer and stricter rules” to ensure firms had stronger cash reserves and stress testing was also needed, Mr Villeroy de Galhau said.

The Bank of England had to intervene to save pension funds running out of cash after gilt yields soared.

One asset manager could have collapsed on Monday had the UK tax cut reversals failed to soothe jittery markets, according to Sky News. If the interest rate on government bonds had risen by half a percentage point, it would have been forced to rapidly unload bonds and possibly collapse.

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