LONDON (AP) — The Bank of England took emergency action on Wednesday after the government spooked investors with an unfunded program of tax cuts to stabilize Britain’s financial markets and stave off a crisis in the broader economy, sending the pound lower and the value of government debt down. flying
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. borrowing to pay expenses.
The Bank of England said it would buy long-term government bonds in the next two weeks to combat the 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 help protect homes and businesses from rising energy prices, fueling fears of rising government debt and higher inflation, which is already at a nearly 40-year high of 9.9%.
The British pound fell to a record low against the U.S. dollar and the yield on UK government debt rose after 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 sterling, 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 economic turmoil is already having a real-world impact, with British mortgage lenders pulling hundreds of offers from the market as brokers wait to see what the bank will do about interest rates.
Susannah Streeter, chief investment and market analyst at Hargreaves Lansdown, said the Bank of England’s move was “a bit of panic and at the same time disappointing the government’s reluctance to implement a policy turnaround”.