The Bank of England stepped in on Wednesday by offering to buy some of the country’s long-term debt as an emergency measure to prevent “material risk” to the country’s financial stability, amid an unprecedented warning by the IMF that the UK’s recent mini-budget risked making the cost-of-living crisis worse.
The central bank said it would buy as many long-dated government bonds as needed between now and October 14 in a bid to calm some of the mayhem that followed the Liz Truss-led government’s massive tax-cutting and government borrowing mini-budget last Friday.
It has seen the pound tumble against the dollar as investors demand a greater rate of return for UK bonds because the level of government borrowing required to fund the financial measures have spooked the markets.
“The Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets,” the Bank of England 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,” it warned.
It said the Monetary Policy Committee (MPC), the independent body which sets the country’s interest rates, has been informed of the “temporary and targeted” financial stability operations, which will be fully indemnified by the UK’s Treasury or the finance ministry.
The Treasury said the move was in line with the central bank’s financial stability objective to carefully monitor financial markets and any potential risk to the flow of credit to the real economy and subsequent effects on UK households and businesses.
Also Read: Icra maintains 7.2 pc GDP forecast for FY23
“Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today (September 28) in order to restore orderly market conditions,” said a UK Treasury spokesperson.
“These purchases will be strictly time limited, and completed in the next two weeks… The Chancellor [Kwasi Kwarteng] 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 spokesperson said.
The Treasury indemnifying the purchases means the bond purchases would be fully covered by the finance ministry in the event of any losses and the Bank of England plans to sell back the bonds it purchased once market conditions stabilise.
The Bank of England says the move follows its Financial Policy Committee recommending action be taken and has welcomed the central bank’s plans for the “temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace”.
“The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit,” the Bank of England added.
It follows Kwarteng unveiling the country’s biggest tax cut package in 50 years last Friday, which sparked fears that government borrowing would spiral to new heights along with rising interest rates and inflation.
The IMF, whose remit is to stabilise the global economy, responded to issue an early economic warning.
It said that while it understood the government’s package was aimed at boosting growth, the cuts could speed up the pace of price rises.
“The nature of the UK measures will likely increase inequality,” the IMF warned. However, those backing the UK government action have criticised the IMF’s intervention and said it was premature to issue such a warning over measures aimed at enhancing economic growth over the long term.