December 1, 2022

Bank of England seeks to stem bond market turmoil after tax cut storm

Bank of England seeks to stem bond market turmoil after tax cut storm

  • Bank of England begins buying bonds, delays sales of gold bonds
  • The IMF ‘does not recommend’ policies like the UK’s growth plan
  • Moody’s: The economic plan is ‘negative growth’
  • Sterling traded down 0.7% to $1,065
  • Kwarteng meets bank heads again

LONDON (Reuters) – The Bank of England sought to quell a firestorm in British bond markets, saying it would buy government bonds as much as needed to restore order after new Prime Minister Liz Truss’ tax cut plans caused financial chaos. .

After failing to quell the sell-off with verbal interventions over the past two days, the Bank of England on Wednesday announced the immediate launch of an emergency bond purchase program aimed at preventing market turmoil from spreading.

The plan presented Friday by Finance Minister Trus Kwasi Quarting for tax cuts along with an energy bill rescue plan, all of which was financed by a massive increase in government borrowing, has led to a freeze in mortgage markets, the sale of debt securities by pension funds and a jump. in corporate borrowing costs.

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It also sparked alarm in foreign capitals.

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

It said it would buy up to five billion pounds ($5.31 billion) a day in British government bonds of at least 20 years, starting on Wednesday and running until October 14. read more.

The announcement, which represented an abrupt reversal of the Bank of England’s plans to start selling bonds it had accumulated since the 2008-08 global financial crisis, immediately lowered borrowing costs.

The 30-year gold bond yield is set to be the biggest drop on records since 1992.

But sterling is down about 1% against the dollar and the euro, putting it on course for its biggest monthly drop since October 2008, right after the collapse of Lehman Brothers.

By 2:48 PM (1348 GMT), it was trading down 0.5% at $1.0679, down 12% in the past three months.

The Bank of England said it will return to its plan to sell bonds and its launch has been delayed until the end of October.

Kwarteng’s plans for deep tax cuts and deregulation to pull the economy out of a long period of stagnation were seen as a return to the Thatchers and Reaganomics of the 1980s.

But it has caused panic among some investors and anxiety among many lawmakers in the ruling Conservative Party.

system recovery

The Bank of England said on Monday that it would not hesitate to raise interest rates and that it was watching the markets “closely”. On Tuesday, Chief Economist How Bell said the central bank is likely to deliver a “significant” rate hike when it meets in November.

But the drop in bond prices continued unabated on Wednesday, prompting the Bank of England to take the step.

Tourists take cover with parachutes as they walk in central London, Britain, September 27, 2022. REUTERS/Hanna McKay

“The purpose of these purchases is to restore orderly market conditions,” she said. “Procurements of any size necessary to achieve this outcome will be undertaken.”

Officials in governments and international financial institutions have begun to voice their criticism of UK policy.

In a rare intervention over a G7 country, the International Monetary Fund urged Truss to reverse course. Read more

Rating agency Moody’s said the policy risks structurally higher funding costs which would be “credit negative” for Britain. Read more

Spain’s Economy Minister Nadia Calvino has been more vocal, calling the policy a disaster, and Ray Dalio, chief investment officer at the world’s largest hedge fund Bridgewater Associates, said he could not believe London’s mistakes.

“The panic selling we are seeing now which is driving UK bonds, currencies and financial assets down is due to the recognition that the large supply of debt the government has to sell is too much in relation to demand,” Dalio said on Twitter.

Julian Jessup, an economist who provided informal advice to Truss during her drive-thru campaign, said the economy was in danger of falling into a “doom loop.” Read more

mad market

So far the government has refused to budge.

Kwarteng, an economic historian who was business minister for two years and a free-market man, insisted that tax cuts for the wealthy along with energy price subsidies are the only way to reignite long-term economic growth.

He has said he will publish a medium-term plan for debt reduction on November 23, which the IMF has described as an “early opportunity for the UK government to look at ways to provide more targeted support and to reassess tax measures, particularly for those who benefit from higher incomes”.

The frenzy in the markets and ensuing anxiety in the ruling Conservative Party will put tremendous pressure on Quarting and Gears. She was elected by the party’s roughly 170,000 members, not by the broader electorate.

Conservative lawmaker Simon Hoare, who has endorsed Truss rival Rishi Sunak to lead the party, has pointed the finger at the government and the Treasury for the policies that sparked the market crash.

“They were made up there,” he said. “This incompetent madness can’t go on.”

One area of ​​concern to politicians directly is the mortgage market, after lenders withdrew record numbers of offers and anecdotal reports suggest that people have been struggling to complete or change mortgage deals.

A slump in the housing market would be a major shock in a country where years of home prices have created a sense of public affluence, and where home buyers are accustomed to more than a decade of ultra-low interest rates.

The IMF’s intervention is symbolic in Britain: its bailout in 1976 in the wake of the balance of payments crisis led to massive spending cuts, and it has long been seen as a humiliating low point in the country’s modern economic history.

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Written by Kate Holton. Additional reporting by William James, Dara Ranasinghe, David Milliken, Sachin Ravikumar, Paul Sandel, Movija M and William Schomberg in London and Emma Pinedo Gonzalez in Madrid; Editing by Alex Richardson, Catherine Evans, Toby Chopra and William Schomberg

Our criteria: Thomson Reuters Trust Principles.