In an effort to calm the market turmoil that threatens to trigger a financial crisis, the Bank of England today stated that it would purchase long-term government debt.
Threadneedle Street said in an extremely uncommon action that it would intervene after the “substantial repricing of UK and worldwide financial assets” that has occurred since Kwasi Kwarteng’s tax-cutting Budget.
“This repricing has grown in importance over the last day, and it is especially harming long-dated UK government debt.”
According to the statement, there would be a significant danger to the financial stability of the UK if market dysfunction persisted or became worse.
This would cause financing conditions to unnecessarily tighten and the flow of credit to the actual economy to decline.
There had been worries that pension funds were having trouble as a result of the sharp swings in gilts and the sharp decline in the value of the pound; some were reportedly seeking cash hurriedly.
The Treasury’s response to the news was, “Global financial markets have seen tremendous volatility in recent days.”
These purchases must be made within the next two weeks and are completely time-bound.
The operation has been fully indemnified by HM Treasury to allow the Bank to carry out this financial stability action, according to a statement.
“The Chancellor is dedicated to the independence of the Bank of England.” The Bank’s goals of financial stability and inflation will continue to be supported by the Government’s strong collaboration with the Bank.
Government bond interest rates, known as gilts, have been climbing in recent weeks. They reached a peak on Friday after the emergency budget.
After the news, the estimated interest rate on 30-year government debt plunged after previously rising over 5%.
That increased borrowing costs, but it also posed issues for financial organizations, especially pension funds, that rely heavily on gilts as an important component of their investment portfolio. The falling value of the pound puts further strain on funds needed to maintain holdings.
As plunging to a record low of only $1.03 on Monday, the pound made some progress but dropped once again this morning after the IMF criticized the “large and untargeted” budget plan.
There was anger earlier when the IMF urged Mr. Kwarteng to reverse his tax cuts in his next mini-Budget on November 23.
White House economic advisor Brian Deese said he was unsurprised by the reaction and cautioned that the strategy increased the likelihood of interest rates rising.
The problem with such an approach in a cycle of monetary tightening like this one is that it just puts the monetary authority in a position to perhaps go tighter. I believe that was the response you witnessed, he said.
Maintaining a focus on budgetary restraint and discipline is especially crucial.
The credit ratings firm Moody’s warning that the fiscal package ran the danger of “permanently undermining the UK’s debt affordability” served to accentuate the tense mood.
In a conversation with many MPs last night, Mr. Kwarteng attempted to calm tension on the Conservative benches by highlighting the need for “cool heads” and asserting that the government “can see this through.”
Additionally, some prominent Tories have been making the case that fear that Labour may soon be in power is what has caused the pound to decline.
Former MEP Lord Hannan posted the following on the ConservativeHome website after Keir Starmer surged to a 17-point lead in the polls: “What we have seen since Friday is partly a market adjustment to the increased probability that Sir Keir Starmer will win in 2024 or 2025 — leading to higher taxes, higher spending, and a weaker economy.”
After rising to $1.08 yesterday, the value of the pound retreated to $1.06 this morning.
If the UK government cannot stop the decline, there are rising concerns that the pound will be at parity with the US dollar.
The Pound has suffered despite the fact that the dollar has been exceptionally strong globally.
The Treasury was incensed by the IMF’s involvement, which came after a day in which markets had stabilized and certain government bonds had appreciated.
John Redwood, a longtime supporter of the Tories, stated: “The IMF were terribly incorrect, as did the Bank of England, about the inflation that they now correctly worry about.
They failed to alert us or the other central banks that the monetary policies of 2021 were too lax, interest rates were too low, and money printing was out of control before the significant inflation. It’s a shame they didn’t provide a warning about it.
“Now they need to be anticipating things. Recession should be something we resist. Of course, we need to handle our money responsibly. However, if austerity measures are implemented as planned and there is a severe recession, borrowing will actually increase rather than decrease.
Sir John vigorously defended Ms. Truss’s tax-cutting scheme while sharply warning the Bank of England against additional interest-rate intervention: The good news is that all forecasts agree that inflation will significantly decline next year, and the sooner the better, thus the government is correct to regard the recession as the key concern for the next year rather than inflation.
Liz Truss’ close friend and former Cabinet minister Lord Frost said the organization had always backed “conventional” policies that had failed to spur economic development.
He advised the PM and Chancellor to just “shut out” the criticism, according to the Telegraph.
It is ultimately up to the elected Government to define budgetary policy, according to a Tory MP. I have faith that pastors will bring about an expanding economy.
‘We have responded at speed to safeguard people and companies through this winter and the next, after the enormous energy price spike caused by (Vladimir) Putin’s unlawful activities in Ukraine,’ a Treasury spokesperson said in response to the criticism.
The Chancellor’s announcement on November 23 “will spell out more specifics on the Government’s fiscal guidelines, including ensuring that debt reduces as a proportion of GDP in the medium term.” The Government was “focused on developing the economy to enhance living standards for everyone.”
Mr. Kwarteng said to City investors yesterday that he was “sure” the £45 billion greatest tax cuts in 50 years would be successful.
He will likely stress to investment bankers today that ministers are working on change to boost growth, including ‘Big Bang 2.0’ initiatives to cut red tape for the City.
While the Bank of England gets ready to raise interest rates, worries about a mortgage crisis are growing.
Numerous items have been removed by lenders as they work to respond to the anticipated increase of expenses.
Prior to or during the next meeting of the Bank of England’s Monetary Policy Committee in early November, investors have been betting on a hike in interest rates of up to 1.5 percentage points.
Huw Pill, the Bank’s chief economist, cautioned Threadneedle Street that it “cannot be inattentive” to recent events, which are considered as an indication that borrowing costs may need to increase in order to safeguard the pound and keep inflation under control.
It is difficult to avoid the conclusion that all of this calls for a major monetary policy response, according to Mr. Pill.