The Bank of England issued a warning about a “substantial threat” to financial stability as it made a new emergency move to calm markets.
It stated that it would purchase additional government bonds to stabilize the price and prevent a sell-off that could put some pension funds at risk of insolvency.
It is the third time the Bank has intervened since the government’s mini-budget prompted investor anxiety.
The chancellor promised substantial tax cuts but did not specify how he would pay for them.
The prime minister’s spokesman stated that she “remains convinced” that her policies would stimulate economic expansion and that she is in constant contact with the Bank.
To reassure investors, Chancellor Kwasi Kwarteng presented his plan to balance the government’s finances by October 31 on Monday.
Despite this and yesterday’s intervention by the Bank, just four days before the Bank’s self-imposed deadline to withdraw its support, the cost of government borrowing soared.
Pat McFadden, shadow chief secretary of the Treasury, stated that the Bank’s need to intervene for a second consecutive day to calm markets “increases pressure on the chancellor to reverse his budget.”
The government obtains the funds it requires for expenditures by issuing bonds to investors. In response to the September mini-budget, however, markets demanded higher interest rates on these bonds, and government borrowing costs soared to alarming heights.
The Bank of England was compelled to buy bonds for the first time to prevent a sell-off after the pound reached a record low.
The upheaval has spread to the mortgage market, where hundreds of items have been withdrawn due to pricing worries for these long-term loans.
For the first time in more than a decade, typical two- and five-year fixed mortgage rates surpassed 6% last week.
Under pressure from its lawmakers to alter its course, the government has had to make a series of embarrassing retreats.
Among other things, it had to abandon a pledge to eliminate the highest income tax rate.
Tuesday, the Institute for Fiscal Studies (IFS) warned that Mr. Kwarteng would have to make “huge and severe cuts” of up to £60 billion to balance the books when he unveils his economic plan on October 31.
Mr. Kwarteng will answer questions from members of the House of Commons for the first time since his appointment this afternoon.
The Bank of England rarely uses the phrase “a material risk to the UK’s financial stability” to describe a threat to the financial system that it cannot comfortably ignore. Even rarer is the fact that numerous senior Bank executives have said that the government’s domestic policy may be partially to blame for the instability.
They are not isolated. The substantial increase in the cost of new government borrowing – the interest on these bonds – indicates investors’ concern that the United Kingdom’s tax-cutting policies could cause it to overextend itself. And pension funds and borrowers are affected by the aftermath.
Again, a rare occurrence, it was the Bank that had to attempt to soothe their suffering. However, it has made it clear that the medicine is only a stopgap, and the market’s persisting discomfort demonstrates that it is ultimately looking to the cause of its unease – the chancellor’s strategy – for a solution.
The resolution of this religious issue will ultimately depend on the Halloween plan unveiled by the chancellor. If the IFS is correct, restoring credibility could require public spending cutbacks of over £60 billion.
Explaining its intervention on Tuesday, the Bank of England noted a “significant re-pricing” of government bonds since the beginning of the week and warned of the possibility of a new market slump.
In addition to continuing to purchase bonds as part of the original emergency measures initiated on 28 September, the central bank said that it will now purchase a broader array of bonds.
Sir John Gieve, a former Bank of England deputy governor for fiscal stability, stated that the Bank was largely intervening to preserve pension funds, the majority of which is invested in government bonds.
However, he stated that the “underlying problem” was that markets did not believe the government would be able to cut expenditures sufficiently before the implementation of its growth initiatives.
Sir John told that the underlying problem stemmed from the declaration of massive borrowing without a clear plan to pay for it.
“And according to the most recent rumors, to balance the budget, Mr. Kwarteng will have to pledge [billions] in spending cuts. That’s one thing for him to say, but can he truly carry it out?”
Prime Minister Liz Truss has stated that the planned £43 billion in tax cuts will stimulate economic development and, as a result, pay for themselves.
In contrast to his mini-budget, the chancellor has pledged to release an independent forecast of the UK’s economic prospects by the OBR, the independent budget watchdog, with his economic plan on 31 October.
However, Ms. Truss may face a mutiny from her MPs after refusing to announce whether she will increase benefits in line with inflation in April.
Instead of boosting benefits in line with salaries, it is believed that the government could save $5 billion by doing so.
