Emergency action by Bank of England amid UK economic turmoil

Emergency action by Bank of England amid UK economic turmoil

Kwasi Kwarteng WON’T rethink tax-cutting Budget: Ministers deny blame for ‘global’ market chaos after Bank of England is forced to launch £60billion government debt buy-up to stop soaring interest rates causing ‘mass’ collapse of pension funds

  • Bank of England has stepped in to buy long-term government debt to stop ‘material risk’ of financial chaos
  • The BoE will buy gilts for the next two weeks after interest rates soared in the wake of the Emergency Budget  
  • IMF has criticised the package, White House has urged ‘prudence’ and Moody’s warned on UK credit status
  • But Kwasi Kwarteng has insisted he will not be rethinking the budget in the face of the plummeting Pound 
  • City minister Andrew Griffith also sent out today to insist the Treasury is going to ‘get on and deliver that plan’
  • But former Tory Chancellor Ken Clarke this evening slammed budget as ‘catastrophic’ and ‘a serious mistake’ 

Kwasi Kwarteng will not rethink his tax-cutting budget, with ministers refusing to take the blame for the ensuing market chaos, despite the Bank of England being forced to launch a £60billion government debt buy-up to prevent soaring interest rates causing a collapse of pension funds.

In a shock and highly unusual move today, the Bank of England declared it would be purchasing gilts in response to the ‘significant repricing of UK and global financial assets’ since Mr Kwarteng’s announcement on Friday.

It has emerged that the extraordinary intervention was triggered by fears that otherwise institutions would have been crushed within hours – putting the whole system at risk.

They were under huge pressure from huge moves in gilts – bonds issued to finance government borrowing – combined with plunging in the Pound. And officials believed they were witnessing a ‘dynamic run’ similar to that seen when Northern Rock failed at the start of the credit crunch, according to Sky News. 

Some were said to have been urgently raising capital to cover their liabilities. The Bank’s action is designed to add more demand for gilts and and pump up their prices – which in turn brings down the interest rates.

Why has the BoE stepped in, and what is it doing? 

Governments around the world have been under pressure from rampant inflation caused by the Covid recovery and Ukraine war.

But the situation has become dramatically worse in the UK in the days since the Budget.

Markets took fright after Kwasi Kwarteng announced a major package of tax cuts, funded by extra borrowing, alongside a huge bailout to freeze energy bills.

The implied interest rate on gilts – bonds the government issues to raise money – has soared, with 30-year gilts going from just over 1 per cent a year ago to top 5 per cent.

This causes problems for the government, as borrowing becomes far more expensive.

However, the Bank was spurred into action after the long-term gilts market looked on the verge of causing a more immediate financial meltdown.

Defined pension funds use so-called Liability Driven Investment (LDI) funds, designed to ensure they have enough assets to cover future liabilities.

But the volatility in the markets have meant pension funds who hedged against low yields facing sudden demands to pump more cash into LDIs.

That has in turn made some sell gilts to realise cash, forcing prices down – and yields up because fewer people want to buy them.

The Bank stepping into buy long-term gilts over the next fortnight means that prices should come down, reducing the pressure and allowing pension funds time to adjust.

Threadneedle Street will be purchasing up to £5billion of 20-year plus gilts from today, every weekday until October 14.

The purchases – which could total £65billion – will be financed from Bank reserves. 

The Bank said in a statement: ‘This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. 

‘This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.’

But despite signs of Tory nerves Mr Kwarteng’s allies were defiant saying there is no prospect of a change in approach. ‘No rethinks,’ insisted one.

City minister Andrew Griffith was sent out this afternoon to make clear the government was going to ‘get on and deliver that plan’. 

Asked whether ministers took responsibility for what was happening in financial markets, he said: ‘No, we both know that we’re seeing the same impact of Putin’s war in Ukraine cascading through things like the cost of energy, some of the supply side implications of that.

‘And that’s impacting every major economy and just the same, every major economy, you’re seeing interest rates going up as well.’

He added: ‘We think they are the right plans because they make our economy competitive. At the end of the day, that is ultimately what we have got to do. 

‘What politicians are responsible for is making the economic decisions that will drive continued growth. You know that one of the things that has bedevilled our economy is our inability to reach that top 2.5 per cent rate of growth. It has happened in the past, it happened before the 2008 financial crisis. 

‘We can get back to that, but we are only going to do so, with a programme of supply side reform that was embedded in the growth plan.’

Meanwhile, Mr Kwarteng met senior investment bankers in Downing Street today to discuss City reforms, and is said to have ‘underlined the government’s clear commitment to fiscal discipline’.

He also stressed he is ‘working closely’ with the Bank of England and OBR. 

Responding to the Bank’s announcement, the Treasury said ‘global financial markets have seen significant volatility in recent days’ – although it appears the UK has been hit harder than other countries.

‘These purchases will be strictly time limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury,’ a statement said. 

‘The Chancellor is committed to the Bank of England’s independence. The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives.’

But former Tory Chancellor Ken Clarke this evening slammed Mr Kwarteng’s budget ‘catastrophic’ and ‘a serious mistake’, adding that it should be ‘torn up’.

He told Sky News: ‘I have never known a budget cause a financial crisis immediately like this. When I listened the budget I was astounded by its contents and I hope we very rapidly get out of it. 

‘I was hoping that now we have gone through the circus of the leadership election we were now going to get down to dealing with a serious national crisis and I was quite prepared to give them time and wish them success in the national interest, but they have made a catastrophic start. 

‘The budget was a serious mistake and it has caused a serious problem.

He added: ‘The budget was put forward in the naïve belief that firstly they had to deliver tax cuts because it would give them a good headline the next day and that if you give tax cuts to really good bankers, that would get us back to growth and it would trickle down to everybody else. 

‘Well, I hope that has all been torn up and they are now sitting down and listening to the Treasury, the Bank of England and the serious economists who are happy to give them proper advice.’  

On another brutal day for British politics and markets:

  • Tory splits have re-emerged as MPs broke cover to condemn Liz Truss’s ‘inept’ plans for boosting growth, with threats of a revolt over axing the 45p top tax rate; 
  • A host of other Conservatives turned their fire on the IMF after the international body condemned the government’s tax-cutting Budget; 
  • There are concerns that soaring interest rates could hammer the housing market with predictions prices will nosedive by more than 10 per cent next year; 
  • Ms Truss and Mr Kwarteng are facing criticism for failing to speak publicly on the crisis, with the Chancellor expected to surface tomorrow. 

‘Massive s***show!’ City traders fume at Liz Truss and predict her imminent demise

Traders in London have made their feelings known during a “volatile” week for the markets after the Government’s mini budget. The Pound hit an all time low of close to $1.03 on Monday while the Bank of England intervened in the gilt market, or UK government bonds, to stem the market’s rout.

From several days ago. UK Column gives some context

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