Bank of England intervenes in market to halt UK economic crisis
The Bank of England took emergency action Wednesday to stabilize U.K. financial markets and head off a crisis in the broader economy after the government spooked investors with a program of unfunded tax cuts, sending the pound tumbling and the cost of government debt soaring.
The central bank warned that crumbling confidence in the economy posed a “material risk to U.K. financial stability,” while the International Monetary Fund took the rare step to urge a member of the Group of Seven advanced economies to abandon its plan to cut taxes and increase borrowing to cover the cost.
The Bank of England said it would buy long-term government bonds over the next two weeks to combat a recent slide in British financial assets. The bank’s actions are focused on long-term government debt, where yields have soared in recent days, pushing up government borrowing costs.
“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,″ the bank said in a statement. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.″
The move came five days after Prime Minister Liz Truss’ new government sparked investor concern when it unveiled an economic stimulus program that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions. It also wants to spend billions to help shield homes and businesses from soaring energy prices, sparking fears of spiraling government debt and higher inflation, which is already running at a nearly 40-year high of 9.9 percent.
The British pound plunged to a record low against the U.S. dollar Monday following the government’s announcement, and yields on U.K. government debt soared. Yields on 10-year government bonds have risen 325 percent 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 10-year bond yields falling to 4.235 percent in midday trading in London.
Yields, which measure the return buyers receive on their investment, had risen to 4.504 percent on Tuesday from 3.495 percent the day before the tax cuts were announced.
The pound traded at $1.0628 on Wednesday in London, after rallying from a record low of $1.0373 on Monday. The British currency is still down 4 percent since Friday, and it has fallen 20 percent against the dollar in the past year.
Opposition parties demanded Parliament be recalled from a two-week break to confront the economic crisis. But Truss and Treasury chief Kwasi Kwarteng stayed silent and out of sight, gambling that the economic storm will pass.
The economic turmoil is already having real-world effects, with British mortgage lenders pulling hundreds of offers from the market as brokers waited to see what the bank would do on rates.