Bank of England alerts watchdog over market rigging fears

The City watchdog is investigating the possibility that traders tried to rig the price that the Bank of England paid for government bonds in a quantitative easing auction, it emerged on Tuesday.

Paul Fisher, the Bank of England's executive director for markets, revealed in testimony to the Treasury select committee that the Bank had refused to buy one particular government bond – known as a gilt – at one of its regular "reverse auctions" in October 2011, because it feared there had been an attempt to manipulate the market.

"The auction went ahead, but we didn't allocate any purchases to one particular bond that was being offered to us, whose price had gone up very substantially in the market that morning, against the run of the market." He added that the Bank had been sufficiently concerned to refer the case to the Financial Services Authority – which was succeeded in April by the new regulator, the Financial Conduct Authority. News of the investigation follows a series of high-profile scandals over shady practices in the City.

Three brokers have been charged over allegations of rigging the key interest rate Libor, while the FCA is also studying claims that energy trading firms sought to rig the wholesale gas market.

Fisher said there had also been several other occasions when the Bank had been sufficiently concerned about the behaviour of certain traders in the market to demand an explanation from them.

Andrea Leadsom, the Conservative MP whose questioning prompted Fisher to reveal the investigation, said it would be, "an ultimate irony, not to mention a public outrage," if bankers had tried to fix a process that was partly aimed at stabilising the financial system. Fisher agreed that, "if that was what they were doing, it would be thoroughly reprehensible".

Since QE was launched in March 2009, the Bank of England has bought a total of £375bn-worth of gilts, using electronically-created money, through so-called "reverse auctions", where bondholders such as banks compete with each other to sell their bonds to Threadneedle Street.

The FCA made no comment, but MPs are expected to press the regulator's chief executive Martin Wheatley about the investigation when he appears before the committee in the autumn, if no public announcement has been made by then about the outcome.

Fisher appeared before the committee – with Robert Stheeman, the chief executive of the government's Debt Management Office – to discuss the merits and challenges of QE. Fisher conceded that extricating the Bank from the unprecedented policy would be "the biggest challenge we will have had for 50 or 60 years". But he reinforced market expectations that such a change was some way off.

News on Tuesday that inflation had risen to its highest rate in more than a year posed further challenges for the Bank as it considers whether to extend QE in the face of a fragile economy. Official data showed inflation hit 2.9% in June, less than the 3.1% level that would have forced the governor Mark Carney to write an explanatory open letter to the chancellor, George Osborne. But with wage growth at just 1.3%, the rise in the cost of living means pay continues to fall in real terms.

The TUC said that Britain's workers are suffering the most protracted squeeze on their incomes since the long depression of the 1870s. Its calculations based on Bank of England data suggest real wages have now fallen for 40 months. The only time they fell for a longer was from 1875 to 1878.

The TUC's general secretary Frances O'Grady said the rise was "further bad news for households and the wider economy".

Powered by article was written by Heather Stewart and Katie Allen, for The Guardian on Tuesday 16th July 2013 19.45 Europe/London © Guardian News and Media Limited 2010


image: © Ofer Deshe

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