“UK pension funds were on the verge of a crisis due to margin calls on interest rate derivatives creating a forced liquidation spiral in UK government bonds,” he explained.
“This left the BoE with no choice but to announce emergency gilt purchases to prevent a run on the system.”
The synchronised rally stood in stark contrast to just days ago when a host of central bank rate increases around the world rattled financial markets.
The whiplash was particularly dramatic for investors in British assets. After the BoE’s rescue plan, the pound jumped more than 3 per cent.
Meanwhile, yields on 30-year gilts sank, ending the day 100 basis points lower in one of the largest one-day rallies for a developed sovereign bond market in modern history.
UK yields had spiked in response to the government’s debt-funded tax-cutting spree, rising to more than 4.5 per cent – the highest since 2007.
The question for markets is to what extent central banks will be willing to act as circuit breakers as they tackle runaway inflation with monetary tightening.
Mr De Silva said the prevailing view is that developed market central banks, except Japan, will continue to increase interest rates “until something breaks”.
Banana republic economics
“That something broke in the UK, and I think the feeling is that the Fed or the ECB will themselves continue to follow through with their plans until some systemic risk surfaces,” he said.
Stephen Miller, investment strategist at GSFM, said the BoE was left with no other option, reflecting the “policy mess in which the UK is mired”.
“At face value, the BoE intervention is an easing of monetary policy that follows on a substantial easing of fiscal policy which will simply fuel inflation at a time when it has already reached a 40-year high,” he said.
“Sustaining the intervention will visit on the UK a policy mix that resembles the worst excesses of monetary financed fiscal deficits redolent of banana republic economics of the 1970s.”
Mr Miller disputed that Britain had arrived at a turning point in stability. “To quote Winston Churchill, ‘this might be the end of the beginning not the beginning of the end’,” he said.
“It’s not implausible that this might buy time, but it’s not going to solve the problem. For the UK, if anything, it complicated the problem.
“The BoE’s counter inflation objective has been compromised – sacrificed on the altar of financial stability. Even if it’s not a QE [quantitative easing] measure, it has the same effects as QE, so it’s inflationary, and we know the fiscal package is inflationary.
“I don’t think it represents a turning point for risk.”
ANZ’s Brian Martin and Daniel Hayes said it’s difficult to see how the BoE can deliver anything less than a 1 percentage point rate increase at its November meeting with bond buying amounting to temporary QE at odds with monetary policy.
The local currency surged back above US65¢ on Thursday and the Bloomberg spot dollar index shed 1 per cent.
China and Hong Kong stocks rebounded with sentiment also aided by a pause in the yuan’s slide.
In the US, all three major benchmarks rallied on Wednesday, with the Dow gaining 1.9 per cent, the S&P 500 advancing 2 per cent and the Nasdaq jumping 2.1 per cent.
Apple lagged, slumping on a report that it decided not to boost production of the “basic” iPhone 14 model after an anticipated surge in demand failed to materialise.