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Yellen reassures on health of global economy after IMF stokes fears of UK contagion

US Treasury Secretary Janet Yellen - JONATHAN ERNST, REUTERS
US Treasury Secretary Janet Yellen - JONATHAN ERNST, REUTERS

US Treasury Secretary Janet Yellen has moved to reassure markets about the health of the global economy after the IMF stoked fears of spillover from the market crisis in the UK.

Ms Yellen insisted that financial markets are “functioning well” as the relentless rise of government borrowing costs paused and stocks in Europe and on Wall Street bounced back.

The IMF sparked fears earlier in the week after it said it was “monitoring recent economic developments in the UK,” raising concerns about possible spillover from the ongoing market crisis.

On Wednesday policymakers from both the European Central Bank and the Federal Reserve suggested continued aggressive rate rise could be on the cards on both sides of the Atlantic, despite global growth concerns.

Earlier on Wednesday, global stocks and bonds had taken another tumble amid a continued severe reaction to the Chancellor’s £45bn of tax cuts, fears of aggressive action by central banks, and concerns about flaring geopolitical tensions in the Baltic Sea.

The Chinese yuan hit a record low versus the surging dollar and government borrowing costs in the US, UK and eurozone reached their highest levels in more than a decade.

Ms Yellen said the US was monitoring the market turmoil in the UK closely. However, she said turbulence, in particular the consequences of the continued rally for the dollar, was to be expected as US rate-setters step up efforts to tackle inflation.

“We haven’t seen liquidity problems develop in markets [and] we’re not seeing, to the best of my knowledge, the kind of deleveraging that could signify some financial stability risks,” Ms Yellen said.

“With the United States moving faster than many other countries, we’re seeing upward pressure on the dollar and downward pressure on many other foreign currencies.

“To me, these kinds of developments - which represent a tightening of financial conditions - are part of what’s involved in addressing inflation.”

“I think markets are functioning well,” the Treasury chief and former Fed chairman said.

Ms Yellen’s comments and the surprise bond market intervention by the Bank of England helped to calm investor fears and allowed stocks to stage a mild rebound.

The FTSE 100 and eurozone blue-chip stocks reversed heavy losses of up to 2pc to both finish 0.3pc higher while government borrowing costs cooled after surging to multi-year highs this week.

The benchmark 10-year Treasury yield in the US pulled away sharply from the 4pc mark while eurozone bond yields fell back across the board, following a recovery in UK bonds. The UK’s 10-year gilt yield plunged 0.5 percentage points to just above 4pc as the Bank of England took action.

Markets have recently been spooked by concerns that the crisis erupting in Britain risks causing contagion to other countries. However, policymakers at the Federal Reserve and European Central Bank remained undeterred by the market volatility and growth fears, as officials promised more huge increases to interest rates in the coming months.

ECB president Christine Lagarde said: “We will do what we have to do, which is to continue hiking interest rates in the next several meetings.”

Slovakia’s central bank governor Peter Kažimír, who is a ECB council member, said: “Seventy-five basis points is a very good candidate for [us to] maintain the pace of tightening, but it’s also necessary to wait for fresh data.”

In the US, Raphael Bostic, the head of the Atlanta branch of the Federal Reserve, said he supported a fourth consecutive 0.75 percentage point rate rise. He said the US was less at risk of “contagion” from troubles in the UK because of its “considerable amount of momentum.”

City analysts were cautious over whether the recovery signalled that the worst has passed or just marked a pause in the sell-off.

Peter Schaffrik, strategist at RBC Capital Markets, said the Bank’s intervention is a “temporary fix for a structural issue”.

He said: “Today’s intervention does little to address the root cause of the problem, the government’s ill thought through fiscal strategy and thus likely to resurface as a market theme as long as the government does not provide any remedy.”