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The Bank of England is stepping in to calm markets after the UK 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 said it would start buying government bonds at an “urgent pace” to help restore “orderly market conditions”.
The pound rose 1.4 percent against the dollar after volatility in earlier trading.
The currency had hit a record low on Monday following Chancellor Kwasi Kwarteng’s mini-Budget, which pledged tax cuts funded by borrowing as part of a plan to boost economic growth.
The Treasury confirmed Kwarteng met investment banks on Wednesday and reiterated the government’s “commitment to fiscal discipline”.
On Tuesday, the International Monetary Fund (IMF) criticised the UK government over its plan for tax cuts, warning that the measures could further fuel the cost-of-living crisis.
A government minister, Financial Secretary to the Treasury Andrew Griffith, rejected calls for the government to abandon last week’s mini-Budget in the face of market turmoil.
Labour has called on ministers to ditch the proposals but Griffith said they were the “right plans” to grow the UK economy. He claimed “very major economy is dealing with exactly the same issues”.
Speaking to broadcasters, Griffith said the £45bn package of tax cuts announced last week would repair “underlying problems in the economy”. He added the Bank of England had “done their job” by announcing it would buy government debt to stabilise the economy.
The government has promised to release further plans to boost growth and reduce public debt on 23 November.
The Bank has already said it will “not hesitate” to hike interest rates to try and protect the pound and try and stem surging prices. Some economists have predicted the Bank of England will raise the interest rate from the current 2.25 percent to 5.8 percent by next spring.
The projection has led hundreds of mortgage products to be taken off the market.
The Bank said its bond 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.
After the bank’s intervention on Wednesday the UK government’s long-term borrowing costs fell, though still remained high.
The government borrows money to fund its spending plans by selling bonds, or “gilts”, to investors such as pension funds and big banks on international markets. The investor then gets to receive a stream of future payments, or “yield”, based on the interest rate the government has offered.
Due to concerns over whether the government’s plan will work, investors have been demanding much higher interest rates to lend to the UK government. But the Bank now hopes to lower these prices by buying its bonds.
Capital Economics chief UK economist Paul Dales said the Bank had been forced to step in to avoid the early stages of a financial crisis and warned fears over the economic outlook were growing.
“This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working. While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position.
“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long.”
– BBC
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