The Bank of England is getting its act together – but what’s next for the economy?

This is one of those cases where words don’t count much – earlier statements by the Bank had little effect – but action does

About time too. At last, the Bank of England is getting its act together by intervening in the gilt market to cut the government’s borrowing costs.

It cannot immediately undo the damage to international confidence done by Kwasi Kwarteng’s mini-Budget last week. The Treasury will have to work at that, and it will not be possible to make much progress until the revised numbers for government borrowing become clearer. But, meanwhile, the Bank can show that it can cost traders in the gilt market some money if they speculate against UK assets. This is one of those cases where words don’t count much – earlier statements by the Bank had little effect – but action does.

What has been happening is that the yield on government bonds, gilts, was spiralling out of control. The 10-year rate was around 2.6 per cent a month ago. Last week, before the chancellor made his announcement, it was 3.3 per cent.

Yesterday (Wednesday) morning it had reached almost 4.5 per cent. This affects everything – for if the government has to borrow at 4.5 per cent, the banks have to pay that and a bit more to fund their lending. Add in their margin and that means that a 10-year fix (if you could get it) would have to be well over 5 per cent – probably 6 per cent. Worse, the disorder in the markets meant that banks had to freeze their lending on mortgages. Until a bank knows what it has to pay for its money it can’t know what it has to charge for a loan.

That 10-year rate has now come down a bit, to around 4.1 per cent. That is still very high by recent standards, but at least there is some stability again. The combination of this intervention and stopping the plan to reverse quantitative easing seems to have done the job.

However, this does not mean that interest rates will come back down much. That depends on the rest of the world, for global bond yields are still rising. The equivalent US 10-year yield is just under 4 per cent. At the beginning of August it was 2.6 per cent. What the chancellor managed to do was to make what would have been a bad situation – for borrowers if not for savers – a great deal worse.

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Nor should we expect the pound to jump up any time soon. The action in the gilt market may have had the effect of weakening sterling. However, the pound does seem to have steadied against the euro at €1.10, which is towards the bottom end of its five-year range – but not below it.

The dollar is – and will remain – very strong for some while yet; probably until there is some sort of ceasefire in Ukraine. It is possible that sterling, currently at $1.06, could drop below parity as the euro did a few weeks ago. So we will continue to pay more for all the imports denominated in dollars, including oil. That obviously means higher prices at the petrol pumps.

These uncertainties will continue. There is speculation that the government will row back on its tax cuts and spending increases, as it has been urged to do that by the International Monetary Fund. Keir Starmer has urged Liz Truss to take action following that warning. My guess is that she won’t.

We do not have an exchange rate target, so the pound will have to take the strain. But at least the Bank of England and the Treasury may be starting to coordinate policy and that is a start. Meanwhile, a lot more awareness that financial markets matter and a decent dose of humility would be welcome if they are to dig themselves out of this mess.