How the Bank of England saved Liz Truss’s bacon

The language is dry, as you would expect, but the letter from Bank of England deputy governor Sir Jon Cunliffe to Commons Treasury Committee chair Mel Stride published today is terrifying in its implications.

Over 11 pages Sir Jon lays out the chain of events that led from Kwasi Kwarteng’s mini-Budget on Friday 23 September to the meltdown in the gilts market last Wednesday.

The £1.5 trillion time-bomb of liability driven investments held by pension funds duly exploded as sterling and gilt prices crashed in the wake of the speech. By Tuesday it was clear the stability of Britain’s entire financial system was on the line.

Bank staff worked through the night to draw up a rescue plan should it be needed. Sure enough on that fateful Wednesday last week the cascade of gilt sales grew to unprecedented levels. By 10.30am one of the world’s oldest and most sophisticated markets for trading government bonds had completely seized up. Senior figures in the market I have spoken to said they had never known a situation like it.

At that point Britain was staring into the abyss. Without Government intervention pension funds would have been forced to sell risker assets such as corporate bonds and equities to meet collateral calls and the contagion would have swept throughout the system.

At 11am the Bank stepped in with it £65 billion gilts buying programme and some order was restored.

The people around Liz Truss have been briefing for months that the current economic crisis is in large measure the fault of the Bank of England.

But that day the Old Lady of Threadneedle street saved the Prime Minister’s bacon.

@JonPrynn