Must read: volatile pound, UK GDP, Bank of England

There's further volatility on currency markets and stock exchanges Wednesday, with all eyes on confusing rhetoric from the Bank of England.

EUROPEAN MARKETS 

European markets are trading mostly lower, with the DAX in Germany leading the declines after the IMF warned that inflation, higher interest rates and the Ukraine war were sending the global economy towards a recession.

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The FTSE 100 is trading just below the flatline with UK housebuilders at the bottom of the UK index after a gloomy trading update from Barratt Developments (LSE:BDEV), which is down by more than 6%. 

UK GDP 

The UK economy unexpectedly shrank by 0.3% in August versus expectations for 0% growth and following a positive reading of 0.1% in July. Underlying three-month growth also fell by 0.3% versus the previous three months. Production was the biggest driver of the fall, but services also shrank in August. Maintenance work in North Sea oil and gas fields and a slump in manufacturing contributed to the decline.

After this morning’s disappointing GDP figures, the Bank of England may need to tread even more carefully in terms of how aggressive it can be on interest rates to curtail inflation, given the growing risk of recession.

BANK OF ENGLAND 

The Financial Times has reported that the Bank of England is prepared to extend its bond buying programme beyond Friday’s deadline, contradicting comments made yesterday by the Bank’s governor Andrew Bailey who ruled out continuing its intervention by telling pensions funds, ‘you’ve got three days left’ to rebalance their positions. Bailey’s comments sent the pound tumbling to a two-week low, but it is regaining some ground this morning. 

The Bank of England’s messaging to the market over the last 24-hours has been conflicted and confused, causing unnecessary gyrations to the pound and adding to the sense of instability in the markets. This is not the first time that Bailey has had troubles guiding the market. He was labelled the ‘unreliable boyfriend’ last November for signalling lift-off on interest rates but keeping rates unchanged.

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The central bank is meant to laser focused on reining in inflation, with price levels close to double digits, sharply above its 2% target. However, its goal to maintain financial stability is currently overriding its monetary policy mandate, prompting emergency bond buying, which has helped to stem financial market contagion but is also an unintended form of stimulus.

For now, the Bank of England has been forced to delay its shift towards quantitative tightening in conjunction with its rate hiking path as it attempts to restore order in government borrowing markets first and foremost. 

Gilt yields are rising across the curve as the bond market sell-off continues amid the confusion.