December 10, 2022

Bank of England intervenes to achieve financial stability in the UK after Liz Truss budget

Bank of England intervenes to achieve financial stability in the UK after Liz Truss budget

The Bank of England on Wednesday announced a highly unusual intervention in the market in hopes of slowing the rush to get rid of sterling and British bonds that began after new Prime Minister Liz Truss announced her master economic plan.

The central bank said it would temporarily buy British government bonds, a notable move after the government announced on Friday its so-called “mini-budget”.

“If the dysfunction in this market continues or worsens, there will be a material risk to the UK’s financial stability,” the Bank of England said in a statement.

The bank said the purchases “to restore orderly market conditions” would be “implemented on any scale necessary to bring about this outcome.” She also said the time is limited to two weeks.

The pound fell to an all-time low against the dollar after tax cuts

Truss, who is only three weeks in the works, is trying to transform Britain’s economy with bold – some might say risky – measures that have spooked investors. Truss has made no secret of her views on the free market. During the leadership campaign to replace Boris Johnson as prime minister, she said she would cut taxes from the start.

On Friday, it delivered on its promise as the government announced huge tax cuts and a big jump in borrowing. The plans include eliminating the highest income tax rate of 45 percent for people earning more than 150,000 pounds and eliminating the maximum limit for bankers’ bonuses.

Markets issued their early verdict: On Monday, the pound fell to an all-time low against the US dollar, dropping to 1.03 in one stage before recovering somewhat. Some economists said the pound could be par with the dollar.

On Wednesday morning, the pound slipped back to 1.06, after hitting 1.08 on Tuesday.

“This, unlike other volatility in the market, has wound its own,” Keir Starmer, leader of the opposition Labor Party, told the BBC on Wednesday morning. His party is up 17 percentage points, according to a recent YouGov poll. This is the party’s biggest advance against the Conservatives since 2001, when Labor leader Tony Blair scored a landslide victory.

Truss will have to call a general election by January 2025 and is eager to put her ideas about the economy into practice.

On Tuesday, the International Monetary Fund issued a rare rebuke of the new British government’s handling of its economic policy.

In an unusually blunt statement, she said she was “closely monitoring” the situation in the UK, adding that the government’s plans were likely to “increase inequality”. She said untargeted fiscal packages were not recommended during a period of high inflation.

Truss and her advisor, Kwasi Quarting, defended their vision of the economy.

“They are willing to risk losing popularity because they believe it will work in the long run,” said Tony Travers, professor of politics at the London School of Economics.

He noted that, unlike some of her Tory predecessors, including Johnson and Theresa May, Truss’s views of the free market were crystal clear. Her government wants to “transform Britain into a less taxed and more resilient economy that competes head-on with high-paid and talented workers with the European Union and the world”.

“Whether it works or not, only time will tell,” he said, adding, “Whether it works in the short term, time will tell soon.”