The Bank of England has announced plans to start buying government bonds at an “urgent” pace, in order to ease market reaction following the fallout of Friday’s mini-Budget.
The government’s plans for higher borrowing and large-scale tax cuts saw borrowing costs increase and the value of pound sterling plummet.
The Bank of England said that prolonged market volatility would come as a “material risk to UK financial stability” and action needed to be taken to restore “orderly market conditions”.
It said that its intervention with bond purchasing would be “time limited” and on a scale that is deemed necessary to ease conditions.
The pound hit a record low of $1.03 against the US dollar on Monday before recovering ground. It has since dipped again to $1.0586 since the International Monetary Fund fired its own criticism at the government’s plans, and the Bank announced its intention to buy bonds.
Investors see the government’s plan to borrow more and slash tax to stimulate the economy a significant gamble at a time of inflationary pressures, meaning that they have been demanding higher interest rates to lend to ministers through Treasury bonds (gilts). This development has pushed borrowing costs even higher.
The Bank of England has now stepped in to purchase bonds in a bid to lower the cost, a move which appears to be working for now.
The Bank has indicated that it is prepared to increase interest rates further to break the fall of the pound and keep a lid on inflation, with economists now suggesting that rates could hit the heights of 5.8 per cent by Spring 2023. They currently stand at 2.25 per cent.
Lenders have suspended offering out new mortgages amid the uncertainty, while there is speculation that pension funds – which often invest in government bonds - could be affected by the current conditions of the market.
Although the Bank’s intervention appears to be working, the value of the pound has continued to subside, putting greater pressure on its Monetary Policy Committee [MPC] to increase interest rates and on the government to publicly outline the costings of its plans and offer reassurances.
The government will be publishing a comprehensive fiscal plan on November 23 to outline how ministers intend to instigate growth and bring down public debt in the medium term, but critics insist that it cannot wait until then.
Shadow chancellor Rachel Reeves called on chancellor, Kwasi Kwarteng, to make an “urgent statement on how he is going to fix the crisis” and ease the concerns of working people concerned about further inflation, whose mortgages and pensions were being affected by market developments.
Kwarteng said that the government would “continue to work closely with the Bank in support of its financial stability and inflation objectives,” after the IMF expressed concern that there was a discord between the government’s fiscal policies and the monetary policy set by the Bank.
Photo by Samuel Regan-Asante on Unsplash
