Bank of England moves to calm bond market rout after tax cut storm

Date:

  • BoE starts buying bonds, postpones gold-plated sales
  • IMF ‘don’t recommend’ policies like UK growth plan
  • Fin min Kwarteng and Prime Minister Truss under fire for policy
  • Pound trading down 0.7% to $1,065
  • Quarteng meets bank bosses again

LONDON, Sept. 28 (Reuters) – The Bank of England tried to contain the firestorm in Britain’s bond markets, saying it would buy as much government debt as it took to restore order after new Prime Minister Liz Truss’ tax-cutting plans went into financial chaos caused.

After the British central bank failed to cool the sell-off with verbal interventions in the past two days, the British central bank announced on Wednesday the immediate launch of an emergency bond-buying program to prevent market turmoil. spreads.

“If the dysfunction in this market were to continue or worsen, there would be a material risk to the UK’s financial stability,” the BoE warned.

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Since Chancellor of the Exchequer Kwasi Kwarteng on Friday outlined a plan for tax cuts on top of a utility bill bailout, all funded by a massive surge in government borrowing, UK mortgage markets have been frozen, pension funds have dumped gilts and corporate borrowing costs have risen.

A source at the Treasury said Kwarteng would not resign and that the government would not reverse its policies. A second person familiar with the situation said Truss still supported Kwarteng and that they would announce further economic reforms soon.

The BoE will now buy up to £5 billion ($5.31 billion) of UK government bonds with maturities of at least 20 years from Wednesday through October 14.

The announcement, which marked a sudden reversal of plans to sell bonds that it had amassed since the global financial crisis of 2008-2009, immediately put borrowing costs down.

The 30-year Treasury yield was set at the largest drop in records dating back to 1992. The pound offset previous losses to rise against the dollar. At $1.0860, it was 1.2% higher on the day and 11% lower in the past three months.

The BoE said it would return to its bond-selling plan by the end of October.

But the political and economic shockwaves that have raised the alarm in foreign capitals continued to resound.

Kwarteng tried to reassure investment bank managers during a meeting described as nervous by attendees, and two senior BoE officials withdrew from public events scheduled for Wednesday and Thursday.

A source at the meeting said Kwarteng had asked the assembled financial bosses what they could do to calm the markets.

“It had not escaped their notice that he put the problem in their lap,” said a source.

Investors and economists have said the government’s plan to wait until November 23 to outline its full-blown debt austerity policy, and the fact that the BoE’s next interest rate announcement isn’t scheduled until November 3, seemed counter-productive to the market frenzy.

“Truss and Kwarteng are now facing a severe economic crisis as the world’s financial markets wait to implement policy changes that they and the Conservative Party will find unpalatable,” said Mujtaba Rahman of the Eurasia Group.

RESTORE ORDER

Quarteng’s plans for sweeping tax cuts and deregulation to lift the economy out of a long period of stagnation have been seen as a return to the Thatcherite and Reaganomics doctrines of the 1980s.

Tourists take shelter under umbrellas as they walk through central London, UK, September 27, 2022. REUTERS/Hannah McKay

But they have caused panic among some investors and unrest among many lawmakers from the ruling Conservative Party.

Pressure on the markets was such that pension schemes sold gilts to meet emergency calls from underwater collateral positions, or sold to reduce their exposure because they couldn’t meet those money calls, according to pension advisers.

“There are currently no funds left in schemes,” said a pension consultant ahead of the BoE’s intervention. Another person familiar with the decision confirmed that the BoE was moving because of issues facing pension funds, the main holders of long-standing gilts.

The BoE said the purchases were intended to restore orderly market conditions. “The purchases will be made at any scale necessary to achieve this result.”

Foreign government officials and international financial institutions have begun to publicize their criticisms.

In a rare intervention over a G7 country, the International Monetary Fund urged Truss to change course.

US bond giant PIMCO said it would be less confident in sterling than before last Friday’s announcement.

Spain’s economy minister, Nadia Calvino, was blunt, calling the policy a disaster.

MARKET FRENZY

So far, the government has refused to budge.

Kwarteng, an economic historian who served as secretary of state for two years and is a convinced free trader, has maintained that tax cuts for the rich, in addition to aiding energy prices, are the only way to revive long-term economic growth.

The market turmoil and subsequent alarm among conservative lawmakers will put enormous pressure on him and Truss, who was elected by the party’s roughly 170,000 members, not the wider electorate. The party will hold its annual conference next week.

Conservative lawmaker Simon Hoare, who backed Truss’ rival Rishi Sunak for leadership, blamed the government and the Treasury Department for the policies that led to the market disruption.

“They are written there. This inept madness cannot continue,” he said.

One area of ​​immediate concern for politicians is the mortgage market, after lenders landed a record number of offers and anecdotal reports suggested people were struggling to finalize or amend mortgage deals.

A slump in the housing market would be a major shock in a country where rising house prices have radiated a sense of general prosperity for years and where home buyers have become accustomed to more than a decade of bottomless interest rates.

The IMF’s intervention is also of symbolic significance in Britain: the 1976 bailout after a balance-of-payments crisis forced massive austerity measures and has long been regarded as a humiliating low in the country’s modern economic history.

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Writing by Kate Holton; Additional coverage by Elizabeth Piper, William James, Dhara Ranasinghe, Carolyn Cohn, Sachin Ravikumar, Paul Sandle, Muvija M and William Schomberg in London and Emma Pinedo Gonzalez in Madrid; Editing by Alex Richardson, Toby Chopra, William Schomberg and Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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