The Bank of England today dramatically declared it will buy long-term government debt in a bid to ease market chaos threatening to cause a financial meltdown.
In a highly unusual move, Threadneedle Street said it will step in after the ‘significant repricing of UK and global financial assets’ since Kwasi Kwarteng’s tax-cutting Budget.
The extraordinary intervention came after concern that pension funds were struggling with the huge moves in gilts combined with the plummet in the Pound, with some said to have been urgently raising capital.
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.’
Responding to the 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.’
The interest rates on gilts – government bonds – have been rising over recent weeks, and spiked after the emergency Budget on Friday. The implied yield on 30-year government debt had risen above 5 per cent.
That made borrowing more expensive for the state, but it also caused problems for financial institutions, particularly pension funds that use gilts as a key part of their strategy to hedge against inflation and interest-rate risks.
At the same time capital needed to maintain positions – rather than sell the gilts at a huge loss – is being stretched by the declining value of the Pound.
The interest on 30-year gilts tumbled after the announcement, while the Pound veered wildly – briefly spiking back to $1.08 before sinking below $1.06 again.
Shadow chancellor Rachel Reeves called for Mr Kwarteng to make an ‘urgent statement’ to address ‘the crisis that he has made’.
Sir Charlie Bean, a former deputy governor of the Bank of England, said the intervention was ‘clearly right’ but interest rates will still likely need to rise.
Sir Charlie told the BBC: ‘The need for an immediate rate increase is much reduced. It is not going to go away though.
‘It is likely that accompanying the fiscal expansion that was announced at the end of last week, the bank will have to significantly raise interest rates.
‘The financial stability action today is not going to change the fact that mortgage interest rates will be rising in the future.’
This chart shows the 10-year gilt yield has risen over recent months, causing alarm about financial stability
The interest rates on gilts – government bonds – have been rising over recent weeks, and spiked after the emergency Budget on Friday. The yield on 30-year government debt tumbled after the announcement, having prevously risen above 5 per cent
The Pound briefly spiked above $1.08 as the announcement was made, before sliding again
Kwasi Kwarteng met investment banks today to offer reassurance after his tax-cutting Budget spooked traders
Mr Kwarteng was meant to be talking to the bankers about his plans for a ‘Big Bang 2.0’ for the City
The currency had clawed back ground after reaching an all-time low of just $1.03 on Monday, but fell again this morning after the IMF criticised the ‘large and untargeted’ fiscal package
Sir Charlie said a rapid market response could be anticipated, following the Bank of England’s announcement.
‘Merely the fact of the bank standing ready to purchase UK government bonds automatically helps to stabilise the market, and I have to say this is clearly the right thing to do.’
Joshua Raymond of XTB.com said there had been an ‘immediate fall’ in long-dated UK gilt yields after the Bank’s action, with the 10-year and 30-year bond yields falling by around 0.4 percentage points in a ‘matter of minutes’.
He said: ‘This is a significant step by the Bank of England.
‘The UK central bank first tried words, which failed. Now it tries to intervene in bond markets to bring yields back under control.
‘On the one hand, this might bring some reassurance to the market that the Bank is ready to act outside of its scheduled meetings.’
He added: ‘The Bank of England is applying plasters on the financial wounds created by the Truss government, who have shown no hint at reversing policy.
‘So until that happens, the question remains how much further will the Bank be forced to intervene further and over what time period?’
Earlier, there was fury at the IMF urging Mr Kwarteng to perform a U-turn on his tax cuts in his next mini-Budget on November 23.
Meanwhile, White House economic adviser Brian Deese said he was not surprised by the response – warning the policy meant interest rates were more likely to rise.
‘In a monetary tightening cycle like this, the challenge with that policy is that it just puts the monetary authority in a position potentially to move even tighter. I think that’s what you saw in reaction,’ he said.
‘It is particularly important to maintain a focus on fiscal prudence, fiscal discipline.’
The febrile atmosphere was underlined with credit ratings agency Moody’s cautioning that the fiscal package risked ‘permanently weakening the UK’s debt affordability’.
Mr Kwarteng tried to soothe nerves on the Conservative benches in a call with dozens of MPs last night, stressing the need for ‘cool heads’ and saying the government ‘can see this through’.
And some senior Tories have been arguing that the fall in the Pound has actually been driven by alarm that Labour might soon be in government.
With Keir Starmer up to 17 points ahead in polls, former MEP Lord Hannan wrote on the ConservativeHome website: ‘What we have seen since Friday is partly a market adjustment to the increased probability that Sir Keir Starmer will win in 2024 or 2025 – leading to higher taxes, higher spending, and a weaker economy.’
The Pound had clawed back ground after reaching an all-time low of just $1.03 on Monday, but fell again this morning after the IMF criticised the ‘large and untargeted’ fiscal package.
Fears are growing that the currency will be at parity with the greenback unless the UK Government can arrest the slide.
The dollar has been extremely strong worldwide, but the Pound has struggled even against that backdrop.
The IMF’s intervention was met with fury inside the Treasury, after a day when markets had calmed and some government bonds had rallied.
Tory veteran John Redwood said: ‘The IMF were very wrong, as was the Bank of England, over the inflation which they now rightly worry about. They didn’t warn us or the other central banks in the run up to the big inflation, that the monetary policies of 2021 were far too loose, interest rates far too low, and the money printing was getting out of control. It’s a great pity they didn’t warn about that.
‘Now they should be looking forward. We should be fighting recession. Of course, we must be prudent with finances. But the truth is that if the austerity policies have their way and we have a big recession, the borrowing won’t go down, the borrowings will soar.’
Sir John offered a robust defence of Ms Truss’s tax-cutting plan, while also offering a sharp message to the Bank of England against further intervention on interest rates: ‘My message today is that the Government are right to see the main threat for the year ahead is recession not inflation because the good news is that all forecasters say inflation will come down a lot next year, and the sooner the better.’
Former Cabinet minister Lord Frost, a close ally of Liz Truss, said the body had always supported ‘conventional’ policies that had failed to boost growth.
He told the Telegraph that the PM and Chancellor should merely ‘tune out’ the criticism.
One Tory MP said: ‘At the end of the day it’s up to the elected Government to set fiscal strategy. I’m confident ministers will deliver a growing economy.’
In response to the criticism a Treasury spokeswoman said: ‘We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by (Vladimir) Putin’s illegal actions in Ukraine.’
The Government was ‘focused on growing the economy to raise living standards for everyone’ and the Chancellor’s statement on November 23 ‘will set out further details on the Government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term’.
Mr Kwarteng told City investors yesterday he was ‘confident’ the biggest tax cuts in 50 years, at £45billion, will succeed.
He is expected to emphasise to investment bankers today that ministers are pursuing reform to enhance growth, including a ‘Big Bang 2.0’ measures to reduce red tape for the City.
The International Monetary Fund was told to keep its nose out of British affairs last night after it launched a withering attack on the Government’s tax-cutting mini-Budget
Meanwhile, there are mounting concerns about a mortgage crisis as the Bank of England prepares to hike interest rates.
Lenders have withdrawn dozens of products as they struggle to adjust to the expectations of higher costs.
Investors have been betting on an increase of up to 1.5 percentage points in interest rates on, or before, the next meeting of the Bank of England’s Monetary Policy Committee in early November.
The Bank’s chief economist Huw Pill warned Threadneedle Street ‘cannot be indifferent’ to the developments of the past days, seen as a signal the cost of borrowing will have to go up to protect the pound and keep a lid on inflation.
‘It is hard not to draw the conclusion that all this will require significant monetary policy response,’ Mr Pill said.