The Bank of England intervenes in the market to stop the economic crisis

LONDON (AP) — The Bank of England took emergency action Wednesday to stabilize Britain’s financial markets and head off a crisis in the broader economy after spooking investors with the government’s unfunded program of tax cuts.causing the pound to fall and the value of government debt to rise.

The Central Bank warned that undermining confidence in the economy posed a “material risk to the UK’s financial stability”, while the International Monetary Fund took the rare step of urging members of the Group of Seven advanced economies to abandon plans to cut taxes and boost growth. don’t borrow to meet expenses.

The Bank of England said it would buy long-term government bonds in the next two weeks to combat a recent slide in British financial assets.. The bank’s actions are focused on long-term government debt, where yields have risen in recent days and government borrowing costs have increased.

“If the dysfunction in this market continues or worsens, there would be a significant risk to UK financial stability,” the bank said in a statement. “This will lead to an unreasonable tightening of financing conditions and a decrease in the flow of credit to the real economy.”

The move sparked investor concern as Prime Minister Liz Truss’ new government unveiled an economic stimulus program that included 45 billion pounds ($48 billion) in tax cuts and no spending cuts. He also wants to spend billions to protect homes and businesses from rising energy prices s, leading to fears of spiraling government debt and higher inflation, which is already at a nearly 40-year high of 9.9%..

The British pound has fallen to a record low Yields on UK government debt rose against the US dollar following the government announcement on Monday. The yield on 10-year government bonds has risen 325% this year, making it much more expensive for the government to borrow to finance its policies.

The Bank of England’s plan to buy government debt helped stabilize the bond market, with the yield on 10-year bonds falling to 4.235% in afternoon trade in London.

Yields, which measure the return buyers get on their investments, rose to 4.504% on Tuesday from 3.495% the day before the tax cuts were announced.

The pound traded at $1.0628 in London on Wednesday, up from a record high of $1.0373 on Monday. The British currency is still down 4% since Friday and has fallen 20% against the dollar in the past year.

The opposition parties demanded the recall of the parliament from the two-week break to fight the economic crisis. But Truss and Treasury chief Kwasi Kwarteng have remained silent and out of sight, gambling that the economic storm will pass.

Northern Ireland Secretary Chris Heaton-Harris, one of several government ministers appearing on Wednesday, said the government’s policies would “make the country richer and more prosperous”.

“I think you’re going to see economic policy take more than a few days,” he said.

The Bank of England on Monday avoided an emergency rate hike to offset the fall in the pound, but said it would be prepared to raise rates. if necessary.

But the bank’s next scheduled meeting isn’t until November, and the lack of immediate action has done little to bolster the pound. The bank was able to immediately intervene in bond purchases because it has a mandate from the Financial Policy Committee to ensure the stability of the financial system.

The British government has said it fully supports the central bank’s intervention in government bonds, known as gilts.

The Treasury said in a statement: “The Bank has identified the risk arising from the recent dysfunction in the gilt markets, so the Bank will be temporarily buying long-term UK government bonds from today to restore orderly market conditions.”

The UK government has resisted pressure to change course, but said on November 23 it would produce a more detailed financial plan and independent analysis from the Office for Budget Responsibility.

Kvarteng met with the heads of investment banks such as Bank of America, JP Morgan, Standard Chartered and UBS on Wednesday to reassure markets worried about his economic plans.

The Treasury said Kwarteng underlined the government’s “clear commitment to fiscal discipline” and promised new measures to boost economic growth soon, including deregulation of financial services.

The central bank spurred action after volatility in financial markets spilled over into the broader economy, raising borrowing costs for the government, limiting mortgage options for homebuyers and forcing some pension funds to sell long-term government bonds used to manage risk.

Some analysts estimate that the recent rise in bond yields has added around £20bn to the cost of servicing the UK’s ballooning debt.

In addition, British mortgage lenders have withdrawn hundreds of offers from the market amid expectations that the Bank of England will raise interest rates sharply to offset the inflationary impact of the pound’s recent decline.

The market’s reaction to the government’s plans has also exposed weaknesses in UK pension funds. In particular, some defined benefit pension plans, in which employers risk guaranteed payouts for retirees, have been forced to sell long-term bonds to cover liabilities, creating the potential for a downward spiral in prices.

Personal finance analyst Alice Haine said: “The emergency intervention comes amid growing concern that defined benefit pension funds … are at risk of being hammered by a fall in the value of the pound and sharp moves in the long-term rose market.” At Bestinvest.

Jagjit Chadha, director of the National Institute of Economic and Social Studies, described Wednesday’s move as a traditional central bank intervention to limit market turmoil.

“What we need is some calm, a willingness to work in the way we think policies should be designed these days, which is proper research by experts and an understanding of its impact on the economy and limiting the devastating effects. trends,” he said. “You know, we don’t need to disrupt this economy anymore.”

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