Bank of England’s Bailey says government debt commitments needed more than ever

Bank of England Governor Andrew Bailey stressed the importance of governments taking more decisive action to address their public finances, particularly as bond markets face increased challenges due to high borrowing levels and inflation. In a speech at a conference in Istanbul organized by Turkey’s central bank, Bailey emphasized that any fiscal policy stance must be credible and aimed at stability, in order to be perceived as such by markets.

He argued that realistic commitments to reduce debt would be crucial in mitigating investor demand for higher returns on government bonds during unexpected shocks, such as the outbreak of the Iran war. Bailey reiterated the central banks' responsibility to focus on bringing down inflation, noting that while recent market volatility was not yet at a stressed or illiquid point, bond markets had become more fragile.

He expressed concerns that greater absorption in markets has led to greater fragility, as leveraged positions can be quickly unwound, causing forced selling and further market moves.