The Bank of England has announced that it will step in to calm markets after the government’s tax-cutting plans sparked a fall in the pound and caused borrowing costs to surge.
It warned that if the market volatility continued there would be a “material risk to UK financial stability”. The Bank will start buying government bonds at an “urgent pace” to help restore “orderly market conditions”.
The pound hit a record low on Monday following the chancellor’s mini-budget. Markets have also warned interest rates could spike after borrowing costs jumped, leading hundreds of mortgage products to be taken off the market.
The Bank said the bond – or “gilt” – purchases would be “time limited” and carried out on “whatever scale is necessary” to ease investor concerns.
It will also postpone the planned start of a gilt sale programme that was only announced last week.
“The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided,” the Bank said in a statement.
Government bond yields – the effective cost of government borrowing – especially at longer borrowing durations, have spiked in the past few days as investors continue to worry about the UK economy.
It comes after the government pledged $45bn worth of tax cuts, funded by borrowing, as part of a plan to boost economic growth.
Concerns about the plan’s affordability have knocked investor confidence in the UK economy, driving the pound to a record low of $1.0350 on Monday.
Some analysts have warned it could even reach parity with the dollar.
There has been widespread criticism of the government’s plan, with International Monetary Fund warning on Tuesday that the measures are likely to fuel the cost-of-living crisis.
The government says it will not reverse its tax cuts, but has promised to release further plans to boost growth and reduce public debt in the weeks and months ahead.
In a statement, the Treasury acknowledged global financial markets had 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 [28 September] in order to restore orderly market conditions,” a spokesman said.
“These purchases will be strictly time limited, and completed in the next two weeks.”
They added that the chancellor was “committed” to the Bank’s independence, adding: “The government will continue to work closely with the Bank in support of its financial stability and inflation objectives.”
Source: bbc.com
