Credible budget policy is needed more than ever, says Bailey

Bank of England Governor Andrew Bailey emphasized on Thursday that governments must intensify their efforts to restore confidence in their public finances, as global bond markets face pressure from high borrowing costs and rising inflation linked to the Iran war. The day saw British government borrowing costs reach their highest in decades, amid a global bond selloff that has hit France particularly hard.

Bailey stated that credible budget policies are crucial to curb investors' demand for higher returns, noting that fiscal policy stance must be credible and directed at stability to reassure markets. He reiterated that such commitments are more necessary than ever, speaking at a conference in Istanbul organized by Turkey's central bank.

This came less than three weeks before Finance Minister John Healey presents his first budget, anticipated to be limited by the surge in borrowing costs triggered by the conflict in the Gulf. Bailey described recent financial market movements as "some way from normal" but not yet at the point of stress or illiquidity, highlighting the economy's resilience to the energy price shock so far.

He also reiterated that central banks must remain focused on their role in reducing inflation, echoing Chief Economist Huw Pill's comments about the broader financial market turmoil. Despite voting with the majority of BoE policymakers to keep interest rates unchanged, Bailey maintains that evidence of energy price increases translating into broader inflation in Britain remains "quite subdued."

However, he acknowledged that "the longer the pattern of higher energy prices persists, the more difficult this situation becomes."