France’s central bank head has warned that the recent turmoil in the UK’s bond markets illustrates the “vicious loop” governments face if they undermine efforts by rate-setters to curb soaring inflation.

Francois Villeroy de Galhau, who sits on the European Central Bank’s ratesetting governing council, said in an interview that the sharp rise in the British government’s cost of borrowing after it unveiled É45bn worth of unfunded tax cuts last month highlighted the importance of “a consistent policy mix” between central banks and lawmakers.

Underlining the risks of fiscal expansion at a time of rapidly rising interest rates, the Banque de France governor said: “If you have a monetary policy with an anti-inflationary stance and there are doubts about whether your fiscal policy will fuel inflation, then you really risk nurturing a vicious loop.”

The sell-off in gilts forced the Bank of England to intervene to halt the collapse of parts of the UK’s pensions industry, which the Banque de France governor cautioned was the latest example of the non-bank financial sector’s vulnerability to cash crunches.

He urged global regulators at the Financial Stability Board to “deliver now on clearer and stricter rules” to ensure funds and traders build up stronger liquidity buffers. “We need more data and in each jurisdiction, we need some kind of liquidity stress testing,” he said.

Comparing the UK turmoil with the money market fund panic after the Covid19 pandemic hit in 2020 and a collateral shortage at energy traders after Russia invaded Ukraine in February, Villeroy said: “They have one thing in common and it is about the liquidity of non-banks.”

The UK government concluded an about-turn on Monday after new chancellor Jeremy Hunt announced he would ditch two-thirds of the tax cuts announced by his predecessor Kwasi Kwarteng, who was sacked on Friday.

Laughing with disbelief at recent events in the UK, which he said had dominated the IMF and World Bank annual meetings in Washington last week, Villeroy said he did not anticipate major euro area governments repeating the mistake.

While governments in the currency bloc are yet to encounter the turmoil seen in the UK over recent weeks, they are spending big to cushion the blow of surging energy prices on businesses and households. Economists, including those at the Screenshot energy packages raise the risk of high inflation