Bank of England Intervenes to Calm Markets as UK Borrowing Costs Soar

The Bank of England, Britain’s central bank, has sought to restore financial stability with an emergency bond-buying programme, after the government’s new fiscal policy caused the pound to dive and borrowing costs to soar.

The British pound on Monday plunged by more than 4 percent to just $1.03, an all-time low. It recovered to about $1.08 on Tuesday, but fell back to $1.06 on Wednesday morning. There has also been a sell-off of UK government bonds, known as gilts.

It came after Prime Minister Liz Truss’s new government unveiled the biggest package of tax cuts in half a century, which was aimed at spurring growth in the UK economy but caused panic among investors concerned about increased government borrowing.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the bank said in a statement on Wednesday.

“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” it said, adding that the central bank “stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

In order to steady gilts, the bank said it would buy bonds “on whatever scale is necessary” in a temporary bond-buying programme, which starts on Wednesday and lasts until Oct. 14.

“The purpose of these purchases will be to restore orderly market conditions,” the bank said.

Mounting Pressure

In response to the bank’s intervention, the Treasury said the government “will continue to work closely with the bank in support of its financial stability and inflation objectives.”

The central bank’s intervention comes after bank officials failed to cool the sell-off with verbal statements over the past two days.

The bank has previously said it would raise interest rates by “as much as is needed” to shore up the pound and keep a lid on inflation.

Kwasi-Kwarteng
British Chancellor of the Exchequer Kwasi Kwarteng walks outside Number 10 Downing Street, in London on Sept. 6, 2022. (Toby Melville/Reuters)

On Tuesday, the International Monetary Fund (IMF) said it is also “closely monitoring” developments in the UK and urged Chancellor Kwasi Kwarteng to “reevaluate the tax measures.”

The crisis has led to unease in some quarters of the Conservative Party, while the opposition Labour Party has demanded that the chancellor makes an urgent statement,

Meanwhile, Kwarteng has been stepping up efforts to reassure financial investors in the City of London about his economic plans.

Talking to investors on Tuesday, he said the government remains “confident” in its long-term strategy to drive economic growth through tax cuts and supply-side reform.

He also insisted that the government is “committed to fiscal discipline.”

PA Media and Reuters contributed to this report.

From The Epoch Times

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