The Bank of England said yesterday that it will launch a temporary government bond-buying program to stave off “material risk to U.K. financial stability” after unfunded government tax cuts spooked markets and sent the British pound tumbling.
The emergency intervention means the central bank will buy government bonds in an effort to stabilize the market and drive down the soaring cost of government borrowing.
The bank said in a statement that it is “monitoring developments in financial markets very closely in light of the significant repricing of U.K. and global financial assets” — especially long-dated U.K. government debt.
As a result, it said “the bank will carry out temporary purchases of long-dated U.K. government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions.”
The move came after the International Monetary Fund urged Britain’s Conservative government to “reevaluate” unfunded tax cuts that it says may fuel inflation and are likely to increase economic inequality.
After the rare IMF warning to a Group of Seven economy, the value of the pound sagged yesterday, trading at under $1.07. The central bank intervention did not boost it.
The British government said it was underwriting the central bank’s emergency bond purchases, which are due to last for two weeks.
“To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury,” it said in a statement.
Treasury chief Kwasi Kwarteng also was meeting with executives from investment banks as the new government seeks to soothe markets alarmed by its decision to slash taxes and increase borrowing.
The government of Prime Minister Liz Truss on Friday unveiled a 45 billion-pound ($48 billion) package of tax cuts in an effort to spur economic growth. But the plan wasn’t accompanied by spending cuts, or even an independent cost estimate, raising concerns that it would swell government debt and add to inflation that is already running at close to a 40-year high of 9.9%.
“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the IMF said in a statement. “Furthermore, the nature of the U.K. measures will likely increase inequality.”
The British pound fell to a record low against the U.S. dollar Monday, to $1.0373, amid investor concern about the government’s policies, which also include borrowing billions to help shield homes and businesses from soaring energy prices.
The Bank of England sought to stabilize markets, saying Monday that it was prepared to raise interest rates “as much as needed” to rein in inflation. But the bank’s next scheduled meeting is not until November, and the lack of immediate action did little to bolster the pound.
The British currency is still down 4% since Friday, and the pound has fallen 20% against the dollar in the past year.
The turmoil is already having real-world effects, with British mortgage lenders pulling hundreds of offers from the market amid expectations the Bank of England will sharply boost interest rates to offset the inflationary impact of the pound’s recent slide. DANICA KIRKA & JILL LAWLESS, LONDON, MDT/AP
