Bank of England clamps down on market chaos after UK government spooks investors

Topline

The Bank of England took action to calm boiling markets on Wednesday as major financial institutions continue to lambast the UK government for tax cuts they say could deepen inequality and hamper economic growth, a move that immediately calmed bond markets but did little to prevent the pound from falling back to its all-time low. fell to last week.

Highlights

UK government bonds rallied on Wednesday after the Bank of England pledged to buy long-term bonds and “restore orderly market conditions”, which were driven into a frenzy last week when the head of the Treasury, Kwasi Kwarteng, announced plans borrowing billions to remove the top income tax rate and support households facing rising energy costs.

This decision did little to stop the decline of the pound against the dollar, which fall below $1.055 after a brief rally, down 1.7% on the day and closing in on the record low of $1.035 it fell to on Monday.

The intervention follows harsh criticism from the IMF, a international organisation with 190 member countries working to stabilize the global economy, which warned plans because deep unfunded tax cuts and huge increases in government borrowing could fuel inflation and deepen inequality.

The organization said he is “closely monitoring” developments in the UK and has urged the government to “reassess” its policies, particularly those that “benefit those on higher incomes”.

The IMF, which rarely publicly criticizes a developed economy, is not alone in worrying about British fiscal policy and the influential credit agency Moody’s warned these policies could slow the country’s economic growth and “permanently weaken” the country’s ability to run up debt.

Moody’s raised the prospect of a future downgrade in the UK’s credit rating and a considerable reduction in the GDP growth forecast for 2023 from 0.9% to 0.3%.

Contra

Cash supported its policies in a statement released after the Bank of England’s surprise intervention on Wednesday. Despite growing panic among investors and scathing rebukes from financial institutions like the IMF, the Treasury blamed “significant volatility” in global financial markets for the collapse in confidence, not Kwarteng’s unfunded fiscal policies.

Peg News

Kwarteng, who was put in charge of running the Treasury by newly installed Prime Minister Liz Truss, announced a new economic strategy that included sweeping tax cuts – which notably benefit the better off more and scrapped the tax rate on higher income – reduced caps on bankers’ bonuses and plans to control soaring energy costs. This scared investors and triggered a market meltdown, prompting the Bank of England to raise the prospect of drastic interest rate hikes to regain control.

What we don’t know

The impact of UK economic plans. Truss promised a quick ’emergency budget’ to tackle soaring inflation and the cost of living crisis as he entered Downing Street earlier this month. However, the plans – one of the biggest sets of tax cuts in decades – were later classified as a ‘tax event’ and came without the usual economic forecasts that accompany budgets. Truss was critical for this and accused of using another term to avoid scrutiny. A full forecast will be expected at the same time as the next budget at the end of November.

Further reading

Pound crashes to record low against US dollar after UK announces new tax cuts (Forbes)

Is Britain now in the midst of an economic crisis? (FinancialTimes)

IMF: What is it and why is it important? (BBC)

Robert D. Coleman