- BoE starts buying bonds and delays selling gilts
- The IMF does not “recommend” policies like the UK growth plan
- Moody’s: Economic plan is “growth negative”
- The pound traded up 0.7% to $1.065
- Kwarteng meets bank bosses again
LONDON, Sept 28 (Portal) – The Bank of England tried to quell a firestorm in Britain’s bond markets by saying it would buy as many government bonds as needed to restore order after incoming Prime Minister Liz Truss’s tax cut plans created financial chaos.
After failing to cool off the sell-off with verbal intervention for the previous two days, the BoE on Wednesday announced the immediate launch of its emergency asset purchase program aimed at preventing the market turmoil from spreading.
The plan put forward by Truss’ Treasury Minister Kwasi Kwarteng on Friday for tax cuts alongside a bailout of energy bills, all funded by a huge increase in government debt, quickly led to a freeze in mortgage markets, pension fund selling of gilts and a jump in consumer spending Corporate borrowing costs.
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It also raised alarms in foreign capitals.
“Should dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability,” the Bank said.
It said it would buy up to £5 billion ($5.31 billion) a day of UK government bonds with maturities of at least 20 years, starting on Wednesday and maturing until October 14. read more
The announcement, which marked a sudden reversal of the BoE’s plans to start selling bonds it had been piling up since the 2008-08 global financial crisis, immediately pushed down borrowing costs.
The 30-year gilt yield was set for the biggest fall on records since 1992.
But sterling fell about 1% against the dollar and euro, putting it on course for its biggest monthly decline since October 2008, shortly after Lehman Brothers collapsed.
As of 2:48 p.m. (1348 GMT), it was trading down 0.5% at $1.0679, down 12% over the past three months.
The BoE said it will return to its plan to sell bonds and its start has only been delayed until late October.
Kwarteng’s plans for deep tax cuts and deregulation to lift the economy out of a long period of stagnation were seen as a return to the Thatcher and Reaganomics doctrines of the 1980s.
But they’ve caused panic among some investors and unrest among many lawmakers in the ruling Conservative Party.
RESTORING ORDER
On Monday, the BoE said it would not hesitate to raise interest rates and was monitoring markets “very closely”. On Tuesday, its chief economist Huw Pill said the central bank is likely to come up with a “significant” rate hike at its next meeting in November.
But the slide in bond prices continued unabated on Wednesday, prompting the BoE to make its move.
Tourists shelter themselves under umbrellas as they walk through central London, Britain September 27, 2022. Portal/Hannah McKay
“The purpose of these purchases will be to restore orderly market conditions,” it said. “Purchases will be made to any extent necessary to achieve this result.”
Officials from international governments and financial institutions have begun to go public with their criticism of UK policies.
In a rare intervention over a G7 country, the International Monetary Fund called on Truss to reverse course. Continue reading
Rating agency Moody’s said the policy risked structurally higher funding costs, which would be “credit negative” for the UK. Continue reading
Spain’s Economy Minister Nadia Calvino was more outspoken, calling the policy a disaster, and Ray Dalio, co-chief investment officer at the world’s largest hedge fund Bridgewater Associates, said he couldn’t believe London’s mistake.
“The panic selling you are seeing now, leading to the collapse of UK bonds, currencies and financial assets, is due to the realization that the huge supply of debt that needs to be sold by the government is far too much for the demand,” said Dalio on Twitter.
Julian Jessop, an economist who informally advised Truss during her leadership campaign, said the economy was at risk of slipping into a “doom loop.” Continue reading
MARKET FIRE
So far the government has refused to budge.
Kmacheng, an economic historian who was economy minister for two years and a free market trader by conviction, has insisted that tax cuts for the wealthy, along with support for energy prices, are the only way to restart long-term economic growth.
He has said he will release a mid-term haircut plan on November 23, which the IMF describes as an “early opportunity for the UK government to explore ways to provide more targeted support and to reassess fiscal policies. especially those that benefit high earners”.
The frenzy in the markets and the resulting disquiet in the ruling Conservative Party will put enormous pressure on Kwarteng and Truss. She was elected by the party’s roughly 170,000 members, not by the broader electorate.
Conservative lawmaker Simon Hoare, who backed Truss’s rival Rishi Sunak for leadership of the party, blamed the government and Treasury for the policies that sparked the market slump.
“They were written there. This inept madness cannot go on,” he said.
One area of immediate concern for policymakers is the mortgage market, after lenders pulled in a record number of offers and anecdotal evidence indicated people were struggling to either close or change mortgage deals.
A slump in the housing market would be a major shock in a country where rising house prices have conveyed a sense of general prosperity for years and where homebuyers have adjusted to more than a decade of rock-bottom interest rates.
The IMF’s intervention is symbolic in Britain: its 1976 bailout after a balance of payments crisis forced huge spending cuts and was long considered a humiliating low point in the country’s modern economic history.
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writing by Kate Holton; Additional reporting by William James, Dhara Ranasinghe, David Milliken, Sachin Ravikumar, Paul Sandle, Muvija M and William Schomberg in London and Emma Pinedo Gonzalez in Madrid; Edited by Alex Richardson, Catherine Evans, Toby Chopra and William Schomberg
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