Some members of the British Labour party are hoping to replace their current leader Keir Starmer, with a soft left-wing candidate, the Mayor of Manchester, Andy Burnham. However there is no certainty as to the outcome, and many warn that the bid to challenge the Prime Minister might fail.
Despite the uncertainty, the FT, senior right-wing Labour officials and other commentators pounced on the news of Andy Burnham’s candidacy in a parliamentary by-election, and declared it would inevitably ‘rattle the markets’. Markets here are given personhood and populated by phantoms. It turns out these phantom persons are powerful and “hold sway” over governments and economics. The FT reminded us of:
The harsh reality facing all British politicians: whoever runs the government will be in thrall to a bond market that holds growing sway over debt-laden major economies.
A Labour party official offered this insight - ominously and anonymously:
This would be the first party leadership contest where the bond market has a vote.
The first party leadership in which imagined phantoms have a vote? Is he dreaming?
The FT went further and claimed exclusive access to the punitive intentions of thousands of phantom investors:
The restive market for UK government bonds, or gilts, is ready to punish any deviation from fiscal discipline by increasing borrowing costs.
Journalists, like Richard Partington of the Guardian purport to understand the reasoning of investors that hold one of the world’s safest and most lucrative assets - UK gilts. Partington, it seems, can read their minds:
…. investors also take a view that a leadership fight is bad for business, and that a Starmer replacement would probably add to borrowing. In a country contemplating its sixth prime minister in seven years, many investors are weary of political instability.
These are mis-representations of reality. The truth is more complex.
First: investors in bond markets do not raise rates. Central bankers raise the most important rate - the ‘base rate’ to which all other rates respond.
To protect the value of their asset, investors in bond markets might try to anticipate a rise or fall in rates by buying or selling bonds - especially bonds obtained under the old rate. Those sales may alter the price of bonds, which in turn can temporarily influence the yield. But it is the fixing of the central bank rate that is a far more powerful influence on bond yields.
At its last meeting on 29 April, the Monetary Policy Committee of the Bank of England overwhelmingly opposed a rise in the base rate of interest - by 8-1. That should have reassured investors that current bonds would maintain their value. However, they have another worry - inflation - that in itself can erode the value of a bond. (Inflation could cause the real inflation-adjusted value of a bond issued at £100 to fall in a sale to e.g. £95.)
In its statement issued on 30 April, the MPC hinted at the risk of two threats: higher inflation that would be tackled by a new, higher base rate of interest. Their statement read as follows:
CPI inflation has increased to 3.3%, and is likely to be higher later this year as the effects of higher energy prices pass through. There is a risk of material second-round effects in price and wage-setting, which policy would need to lean against.
“Lean against” here means raising rates to force down rising prices and wages. It also means disturbing investors in bond markets that hold bonds at older rates - bonds that will automatically be less valuable than any new bonds issued at a higher rate of interest.
Although higher rates can do little to dampen inflation, the threat of higher rates has rightly put the frighteners on bond markets. That is in part because Huw Pill, the Bank’s chief economist was more explicit in his statement on 29 April when he argued that
Our scenarios illustrate how a stronger impulse to inflation may strengthen second-round effects. But I see the risk of second-round effects in each of these scenarios as skewed to the upside.
While Pill was the only member to vote for a rise in interest rates, nevertheless his position as a conservative, neoliberal and hawkish chief economist gives weight to his reasoning and decisions - and to the threat of a scenario “skewed to the upside”.
Central bankers admit they cannot tackle inflation with higher rates of interest.
The harsh reality facing all British (and other) politicians and also bond markets is that unelected central bankers cannot bring down global inflation, but neverthless have the power to harm the economy and to damage the interests of bond market investors by raising rates. Hiking interest rates at a time when incomes and profits are contracting because of the inflation of globalised markets in energy, fertilizers, aluminium etc. - will have little impact on the inflation triggered by closure of the Straits of Hormuz. But it will harm firms, shops, workers and the interests of bond market investors.
The Bank of England has openly admitted that its decisions cannot calm inflation, as the Monetary Policy Committee explained in its statement issued on the 29th April, 2026.
Monetary policy could not affect global energy prices, and should generally look through the initial direct, and typically also some indirect, effects on domestic inflation from a negative energy supply shock. Monetary policy would transmit with too long a lag to impact these direct and indirect effects, but would need to lean against second-round effects in wage and price-setting that proved more persistent.
In other words, despite its admission that it “could not affect global energy prices” the Bank insists that it must raise rates to prevent ‘second round effects’. That is a warning to bond markets that the Bank fully intends to raise rates.
As Suman Suhag, a commenter on my earlier post writes:
Higher rates don’t just slow growth. they directly increase the cost of rolling over global debt. This is where the system becomes fragile: debt that was issued in a low-rate, low-inflation world now has to be refinanced in a high-rate, high-volatility world.
That transition is where bond markets start to reprice risk aggressively.
Bond market reaction was inevitable: to sell bonds that have lower rates, and to price newer bonds at the expected higher rate of interest.
It is the Bank of England’s sabre rattling at its last two meetings that has unsettled bond markets - not the assumed, and still uncertain election of a left-wing candidate to challenge the leadership of the Labour Party.
In Colombia, unelected central bank authority fights democratic authority.
In a dramatic intervention President Petro of Colombia has severed ties with the central bank - the Banco de la República - after technocrats on the board agreed to raise rates.
Colombia’s central bank Governor Leonardo Villar defied Colombia’s President and its Finance Minister by raising rates. That decision caused the government to withdraw the finance minister - its representative - from the central bank board.
For President Petro, the rate hike reinforces a long-standing critique that tight monetary policy is stifling growth and employment. Writing on social media, the president accused the central bank of pursuing a “suicidal” policy that harms the wider economy.
Thanks to Colombia’s legal provisions for the monetary authority, the absence of the governmental representative on the central bank board might paralyse decision-making. Without the presence of a governmental representative, the central bank may be legally unable to arrive at monetary policy decisions.
The Colombian government is adamant that higher rates will hurt the economy. As Reuters reports:
The rate increase could have significant effects on the real economy. According to the Finance Ministry, a move of this magnitude could slow economic recovery, increase borrowing costs for households and businesses, and raise debt servicing costs.
Small and medium-sized companies, construction, retail and tourism are expected to be among the most affected sectors, along with households holding variable-rate loans.
Lower-income groups could face the greatest impact, as reduced purchasing power and tighter access to credit may deepen economic inequality.
Colombia’s central bankers will not suffer as a result of their decisions to raise rates. Instead the people of Colombia and its government will suffer the economic consequences.
Markets and inflation - are global. Central banks are local.
The fact is markets in essential commodities like energy, fertilizer and food have been globalised. They are designed (by conservative, neoliberal economists) to operate beyond the reach and regulation of governments - and beyond the influence of central bankers.
The closure of the Strait of Hormuz has caused supplies of energy, fertilizers, aluminium and other commodities to contract. The contraction of supplies in world where demand for these commodities is high, has naturally led to the inflation of commodity prices.
That inflation is exacerbated by speculation in global markets, as investors (and Trump followers) bid up, and bet on whether the US President will escalate or de-escalate this illegal war on Iran.
This rise in prices of commodities essential to the production of almost all goods, is cutting living standards around the world, and worsening the affordability crisis.
A rise in rates might satisfy the interests of creditors and bankers; but it can only exacerbate the world’s cost-of-living crises by increasing the cost of borrowing for individuals, firms and governments.
My advice to alarmists is to forget left-wing and bond market phantoms. Stick to the forces that truly “rattle” bond markets.
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