The Bank of England must step in to stop market meltdown

Telegraph

08-04-2025

The last few years have been a roller-coaster for central bankers and their reputations.
After 15 years of post financial crisis status quo, the pandemic forced them out of their slumber and into action. The Bank of England was widely praised for its decisiveness in slashing borrowing costs as Covid crushed household spending.
But Threadneedle Street was just as deservedly lambasted for its pedestrian response to the inflationary shock that followed the end of lockdown and Russia's invasion of Ukraine.
The meltdown on global markets is a chance for the Bank and its overseas counterparts to redeem themselves by stepping in to constrain investor panic.
An extraordinary $9.5 trillion (£7.4 trillion) has now been wiped off stocks in the three days of trading since Donald Trump declared economic war on the rest of the world.
With Sir Keir Starmer and the rest of the Cabinet seemingly clueless as to what to do it may fall to Andrew Bailey to intervene with an emergency rate cut that acts as a circuit-breaker.
Economists at Deutsche Bank have described the disruption as 'the biggest shock to the global trading system since the Bretton Woods collapse in 1971' when Richard Nixon took America off the gold standard.
The White House can pretend all it likes that this amounts to a genius plan to rewire world trade in its favour, but this is starting to look like little more than wanton destruction – a wrecking ball to the world economy almost for the sake of it, from a man who revels in the extraordinary power he wields.
Worse, with the US president shrugging off the tariff turmoil as 'medicine', it is hard to see how or when the devastation will end. Having held on to – naively in my view – the hope that Washington was presiding over a short-lived shock and awe moment that would be quickly followed by a softening of tariffs, that has completely evaporated.
Instead, with Trump seemingly doubling down in the form of reciprocal tariffs later this week, traders are now preparing for what billionaire Maga supporter and hedge fund whizz Bill Ackman has warned is tantamount to ' economic nuclear war '.
It is against this apocalyptic backdrop that investors are once again desperately looking to central bankers around the world to step in and save the world from oblivion.
The betting is now very firmly that a global trade war will be the trigger for a wave of interest rate cuts around the world – and not just one either – including from the Bank of England.
The money markets are currently pricing in a 92pc likelihood of a quarter percentage point cut at its next meeting in early May. A further two quarter-point reductions are expected in August and November, with the possibility of a fourth to follow, leaving the base rate at 3.5pc.
Previously only two were priced in for 2025 but clearly the world has changed dramatically in recent days, beyond what virtually every world leader, expert and commentator anticipated. The pressure on policymakers to take more resolute steps is as high as it's been since it became obvious that Bailey was wrong about inflation being 'transitory'.
The main argument against a loosening of monetary policy this time is that slashing rates would be inflationary in a world where tariffs threaten to send the prices of many goods through the roof. It is the main reason why Jerome Powell, Federal Reserve chairman, looks set to resist Trump's attempts to coerce the central bank into resuming rate cuts.
Having been on pause since January, it will probably require a serious weakening of the American economy for the Fed to act again. Some economists think further cuts will be pushed back until much later in the year or even delayed until 2026, unless growing fears of a US recession prove founded.
Yet, those same dynamics don't necessarily apply elsewhere, particularly in Britain. Weakening demand, a strengthening pound, and tumbling oil prices all strengthen the case for faster rate cuts. Willem Buiter, a former rate-setter at the Bank's Monetary Policy Committee, recently told The Telegraph that he thinks there will be 'at most a mild inflationary impact [from] the trade war'.
Whether that paves the way for emergency action from Threadneedle Street is tough to call. It would be a brave step, not least because the risk is that the White House quickly reverses course and the Bank is left looking like it panicked.
Yet nor is it as drastic as it sounds with some central banks on the verge of responding already. Indonesia's central bank said on Monday that it will 'intervene aggressively' in domestic foreign exchange markets when they reopen on Tuesday.
In Taipei, Taiwan's central bank said it will act if necessary to ensure the stability of the Taiwan dollar exchange rate, adding that it has 'sufficient ability' to deal with fluctuations.
Such statements are an acknowledgement that the uncertainty and chaos are almost as damaging as tariffs themselves.
Meanwhile, Freidrich Merz, Germany's incoming chancellor who is locked in ongoing talks about a new coalition government, has warned that the situation in the international stock and bond markets 'is dramatic and at risk of escalating further'.
Elsewhere, unfortunate historical comparisons persist as the S&P 500 threatens to rack up three consecutive days of 4pc-plus declines, which would be the first time the benchmark index has entered such territory since the 1929 stock market crash that signalled the onset of the Great Depression.
If the markets rout deepens much further, then central banks across the world may have no choice but to take pre-emptive action.
As for the assertion of Peter Navarro that the sell-off will eventually turn into a spectacular equities boom, one fears Trump's trade tsar has been standing too close to the fumes from all those markets that have gone up in smoke.