Fears around the policies of new PM Liz Truss are causing “material risk” to the union’s economy
The Bank of England has launched an emergency UK government bond-buying plan – to prevent borrowing costs from spiralling out of control and stave off a “material risk to UK financial stability”.
The bank said it was stepping in to buy up to £65bn worth of government bonds – known as gilts – at an “urgent pace”, after fears over the economic policies of new PM Liz Truss and her finance minister Kwasi Kwarteng sent sterling tumbling, and sparked a sell-off in the gilts market.
The market turmoil had forced pension funds to sell government bonds to head off worries over their solvency – but this threatened them with severe losses and also created a downward spiral in gilt prices, as more were offloaded.
The Bank’s extraordinary intervention, responding directly to Downing Street’s tax-cutting strategy, will pile further pressure on Liz Truss and Kwasi Kwarteng to defend their plan for the UK economy – a plan that spooked markets and shocked most mainstream economists.
While sterling hit an all-time record low of 1.03 against the US dollar on Monday, the yield on 10-year gilts (effectively, the interest rate on public borrowing) has also soared by the most seen in a five-day period since 1976, say experts.
The scale of the crisis in the markets has led to unease in some quarters of the Tory party, while Labour has joined calls for parliament, currently on holidays during the political party conferences, to be recalled.
“The government has clearly lost control of the economy,” said Keir Starmer at the Labour conference in Liverpool. “What the government needs to do now is recall parliament and abandon this budget before any more damage is done.”
However, Andrew Griffith, the financial secretary to the UK Treasury, insisted the government was sticking to the plan set out by Kwasi Kwarteng in the Commons last week.
“What the chancellor and I are focused on is delivering that economic growth plan,” he said. “We think they are the right plans because those plans make our economy competitive.”
In a bid to reduce future borrowing, the UK government is set to ask ministers to make efficiency savings in their departments’ existing budgets to help balance the public finances, according to the BBC.
This chaos comes just days before Tory MPs and thousands of party members will descend upon Birmingham for Liz Truss’s first party conference as prime minister.
Yesterday, a Bank of England (BoE) spokesperson said: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.
“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”
The BoE said it would buy bonds “on whatever scale is necessary” in order to steady gilts. It said the bond-buying programme would be temporary, starting from today until October 14.
“The purpose of these purchases will be to restore orderly market conditions,” said a BoE spokesperson.
The BoE’s action comes as neither Mr Kwarteng nor Ms Truss have shown any willingness to step back from the policies announced last Friday, many of which made good on the promises she had delivered on her leadership campaign trail over the summer.
But the market angst in recent days has seen Mr Kwarteng step up efforts to reassure financiers about his economic plans after the International Monetary Fund (IMF) criticised the government’s strategy.
The BoE has been facing calls to convene an emergency meeting to consider hiking interest rates to try and counter the Liz Truss tax cuts.
The bank’s chief economist, Huw Pill, said on Tuesday a “significant monetary response” may be required – but signalled this would not come until policymakers are due to meet as scheduled in November.
Representatives from Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg were called to attend a meeting with Mr Kwarteng yesterday following days of turmoil.
In an extraordinary statement earlier this week, the IMF said it was “closely monitoring” developments in the UK and was in touch with the authorities, urging Mr Kwarteng to “re-evaluate the tax measures”.
It said that the current plans – including the abolition of the 45p rate of income tax for people on more than £150,000 – are likely to increase inequality.