Bank of England seeks to stem bond market turmoil after tax cut storm


  • BoE starts buying bonds, delays gilt sales
  • IMF ‘does not recommend’ policies like UK growth plan
  • Moody’s: the economic plan is “negative for growth”
  • The British Pound is trading down 0.7% at $1.065
  • Kwarteng meets bank bosses again

LONDON, Sept 28 (Reuters) – The Bank of England sought to quell a firestorm in Britain’s bond markets, saying it would buy as much government debt as needed to restore order after plans to cut debt new Prime Minister Liz Truss’ taxes sparked financial chaos. .

Having failed to calm the sell-off with verbal interventions over the previous two days, the BoE on Wednesday announced the immediate launch of its emergency bond-buying program aimed at preventing the market turmoil from spreading further.

The plan presented by Truss Finance Minister Kwasi Kwarteng on Friday for tax cuts in addition to an energy bill bailout, all funded by a huge increase in government borrowing, quickly led to a freeze on mortgage markets, the sale of gilts by pension funds and a jump. in corporate borrowing costs.

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It also raised alarm in foreign capitals.

“If the dysfunction of this market were to continue or worsen, there would be a significant risk to the financial stability of the United Kingdom,” said the British central bank.

He said he would buy up to 5 billion pounds ($5.31 billion) a day of UK government bonds with a maturity of at least 20 years from Wednesday until October 14 .

The announcement, which represented a sudden reversal of the BoE’s plans to start selling bonds it had accumulated since the 2008-2008 global financial crisis, immediately lowered borrowing costs.

The 30-year gilt yield was set for its biggest drop since 1992.

But the pound fell around 1% against the dollar and the euro, putting it on track for its biggest monthly decline since October 2008, just after Lehman Brothers collapsed.

As of 2:48 p.m. (1348 GMT), it was trading down 0.5% at $1.0679, a decline of 12% over the past three months.

The BoE has indicated that it will reconsider its bond sale plan and its launch has only been postponed until the end of October.

Kwarteng’s plans for deep tax cuts and deregulation to pull the economy out of a long period of stagnation have been seen as a return to the Thatcherite and Reaganomic doctrines of the 1980s.

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

RESTORE ORDER

On Monday, the BoE said it would not hesitate to raise interest rates and was watching the markets “very closely”. On Tuesday, its chief economist Huw Pill said the central bank was likely to propose a “significant” rate hike at its next meeting in November.

But the decline in bond prices continued unabated on Wednesday, prompting the BoE to act.

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

“The purpose of these purchases will be to restore orderly market conditions,” he said. “Purchases will be made on the scale necessary to achieve this outcome.”

Officials from international governments and financial institutions began to go public with their criticisms of British policy.

In a rare intervention on a G7 country, the International Monetary Fund urged Truss to back down. Read more

Ratings agency Moody’s said the policy risked generating structurally higher funding costs, which would be “credit negative” for Britain. Read more

Spain’s Economy Minister Nadia Calvino was more blunt, calling the policy a disaster and Ray Dalio, co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, said he couldn’t believe London mistakes.

“The panic selling you are seeing now leading to the fall in UK bonds, currencies and financial assets is due to the recognition that the large supply of debt which will have to be sold by the government is far too large for the demand. “, said Dalio on Twitter.

Julian Jessop, an economist who provided informal advice to Truss during his leadership campaign, said the economy was at risk of falling into a “catastrophic loop”. Read more

MARKET FRENZY

So far, the government has refused to budge.

Kwarteng, an economic historian who served as business minister for two years and a free trader out of conviction, insisted that tax cuts for the wealthy as well as support for energy prices are the only way to revive long-term economic growth.

He said he would publish a medium-term debt reduction plan on November 23, which the IMF described as “a first opportunity for the UK government to consider ways to provide more targeted support and to reassess the tax measures, especially those that benefit high earners”.

The market frenzy and ensuing alarm within the ruling Conservative Party will put enormous pressure on Kwarteng and Truss. She was elected by the party’s nearly 170,000 members, not the wider electorate.

Conservative lawmaker Simon Hoare, who backed Truss rival Rishi Sunak for the party leadership, pointed the finger at the government and Treasury for the policies that sparked the market rout.

“They were written there. This inane madness cannot continue,” he said.

The mortgage market is an area of ​​immediate concern for politicians, after lenders withdrew record numbers of offers and anecdotal reports suggested people were struggling to make or change mortgage deals.

A crash in the housing market would mark a major shock in a country where rising house prices have for years conveyed a sense of overall wealth and homebuyers have grown accustomed to more than a decade of falling rates. interest at rock bottom.

IMF intervention is of symbolic importance in Britain: its bailout in 1976 following a balance of payments crisis forced huge spending cuts and was long seen as a humiliating low point in the economy. modern economic history of the country.

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Written 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; Editing by Alex Richardson, Catherine Evans, Toby Chopra and William Schomberg

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