Economist Says Bank of England Faces Difficult Trade-Off Amid Global Bond Shock

Professor Costas Milas, writing in a letter published by The Guardian, has argued that the ongoing global bond market shock presents a significant challenge for the Bank of England's policymakers, raising questions about the government's relationship with the central bank.

According to Milas, a Guardian editorial published on September 1 suggested that the global bond shock would bring the government's fiscal responsibility into sharp focus, with such responsibility described as a precondition for avoiding further increases in the UK's cost of borrowing.

However, Milas contends that fiscal policy cannot be considered in isolation from monetary policy. He states that the current rise in UK bond yields poses what he calls a huge challenge for the Bank of England's Monetary Policy Committee (MPC), which is scheduled to make its next decision on UK interest rates on September 17.

Milas notes that this meeting will also be when the MPC announces the volume of government bond sales, known as quantitative tightening (QT), to be pursued over the following 12 months.

The letter frames these decisions as part of a complicated set of trade-offs facing the Bank of England, and suggests that this complexity raises the broader question of whether the government needs to reconsider its institutional relationship with the Bank of England.

The letter was published in response to an earlier Guardian editorial titled "The Guardian view on the global bond shock: Andy Burnham should take note," which appeared on September 1.