Carney has to analyze risks to the UK from drought in bond-market liquidity

Monday, Nov 16 2015

Mark Carney and his officials must take a close look at the risks posed to the U.K. from a possible drought in bond-market liquidity and report back to Parliament, the chairman of its Treasury committee said, as Bloomberg reports. Andrew Tyrie, a Conservative Party lawmaker, said on Sunday in a letter to the Bank of England governor that he would like a "detailed response" to his query on potential threats posed by a cocktail of future unwinding of stimulus, including quantitative easing, and the effects of rules imposed on banks.

“A combination of QE divestments, rising interest rates, and new regulation may leave the U.K. economy -- in the event of a shock to bond markets, possibly triggered by even a relatively modest rise in interest rates -- vulnerable to a vicious circle of declining liquidity and financial distress,” Tyrie said in a statement. “Regulatory action could inadvertently compromise, not bolster, financial stability.”

The BOE’s Financial Policy Committee has already identified market liquidity as one of the main risks threatening the U.K., highlighting the issue repeatedly in the panel’s most recent policy statement in September, and before that in its Financial Stability Report. In that half-yearly review in July, officials pledged a “regular deep analysis” starting with a look at investment and hedge funds.

Sterling is currently being traded around 1.5190 area. Pair is likely to find support around 1.5150 handle and resistance above 1.5250 level. Later today, in the US session, Empire State Manufacturing Index figures are scheduled for a release.

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