British central bank intervenes in the market to stop economic crisis

LONDON (AP) – The Bank of England took emergency measures on Wednesday to stabilize Britain’s financial markets and avert a crisis in the wider economy after the government spooked investors with a program of unfunded tax cuts that sent the pound plummeting and government debt became more expensive. rising.

The central bank warned that crumbling 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 a member of the Group of Seven Advanced Economies to be plan to cut taxes and borrow to cover costs.

The Bank of England said it would buy long-term government bonds over the next two weeks to counter a recent decline in UK financial assets. The bank’s actions are targeting long-term government debt, where interest rates have soared in recent days, raising government borrowing costs.

“If the dysfunction in this market were to continue or worsen, there would be a material risk to the UK’s financial stability,” the bank said in a statement. “This would lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to the real economy.”

The move came five days after Prime Minister Liz Truss’s new government sparked investor concerns when it unveiled an economic stimulus program that included £45 billion ($48 billion) in tax cuts and no spending cuts. It also plans to spend billions to help protect homes and businesses from rising energy prices, raising fears of rising government debt and higher inflation, which has hit a 9.9% high for nearly 40 years.

The British pound plunged to a record low against the US dollar on Monday following the government’s announcement, and interest rates on UK government debt rocketed. The 10-year Treasury yield has risen 325% this year, making it much more expensive for the government to borrow to fund its policies.

The Bank of England’s plan to buy up sovereign debt helped stabilize the bond market, with the 10-year bond yield falling to 4.235% during afternoon trading in London.

The yield, which measures the return buyers receive on their investment, was up on Tuesday to 4.504% from 3.495% the day before the tax cuts were announced.

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

Opposition parties demanded that Parliament be recalled from a two-week break to deal with the economic crisis. But Truss and Treasury chief Kwasi Kwarteng remained silent and out of sight, gambling that the economic storm would pass.

Northern Ireland minister Chris Heaton-Harris, one of the few ministers in attendance on Wednesday, said government policies “would make my country richer and more prosperous”.

“I think you’ll find that economic policy lasts more than a few days,” he said.

On Monday, the Bank of England had waived an emergency rate hike to offset the pound’s decline, but said it would be willing to raise rates if necessary.

But the bank’s next scheduled meeting isn’t until November, and the lack of immediate action hasn’t helped the pound much. The bank was able to intervene immediately with the purchase of bonds because its Financial Policy Committee has a mandate to ensure the stability of the financial system.

The UK government said it has fully endorsed the central bank’s intervention on government bonds, the so-called gilts.

“The Bank has identified a risk from a recent dysfunction in the gold markets, so from today the Bank will temporarily purchase long-dated UK government bonds to restore orderly market conditions,” the Treasury Department said in a statement.

The UK government has resisted pressure to change course, but says it will prepare a more detailed fiscal plan and an independent analysis of the Office for Budget’s accountability on November 23.

Kwarteng met Wednesday with executives from investment banks including Bank of America, JP Morgan, Standard Chartered and UBS in an effort to calm markets alarmed by her economic plans.

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

The economic turmoil is already impacting the real world, with UK mortgage lenders pulling hundreds of offers from the market while brokers waited to see what the bank would do with the rates.

Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said the Bank of England “smells a bit of panic and also frustration that the government seems to be hot on its heels, reluctant to make a political turnaround.”

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