Topsy-Turvy UK Markets Reveal Risks in Policy Responses to the Energy Crisis
Flip-flopping fiscal policy
Back in August, the BoE forecasted a recession. The recession headline grabbed the market’s attention. However, in my opinion, many missed two key conditions the BoE attached to its recession forecast:
- Lack of fiscal response (at the time, the two Conservative candidates for prime minister had shown little appetite for fiscal policy)
- Potential for surging utility prices to trigger a demand shock and disinflation
A Steady Decline in UK Real Rates
Source: Bloomberg, as of 30 September 2022. Used with permission from Bloomberg Finance L.P.
This material is for informational purposes only and should not be construed as investment advice.
Information obtained from outsde sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy.
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No magic bullets
The shocks to the UK markets this week revealed how policy responses to the energy crisis can have disruptive effects on market activity and financial infrastructure. Europe has been dealing with similar issues.
There have been a lot of policy ideas floating around the UK and Europe, including some that aim to cap retail prices and switch benchmarks. My concern with these measures is that actions may cause unintended reactions in hard-to-address areas of the energy financial market system. Government interest in shielding households from rising prices may impede demand responses and runs the risk of harming confidence in fiscal policy if not well calibrated. What’s more, scarce energy inputs could lead to supply chain and production disruptions. More administrative rationing-like measures may come. As the BoE did with its August placeholder forecast, I believe central banks will need to await and assess fiscal actions as they come—and do this in an environment of very high inflation and the need to act within their inflation-targeting mandates.
This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.