Bank of England in fresh emergency to calm markets

 Bank of England in fresh emergency to calm markets

The Bank of England has warned of "material risks" to financial stability as it took a new emergency move to placate investors.

It said it would buy more government bonds to try to stabilize its price and prevent a sell-off that could put some pension funds at risk of collapse.

This is the third time that the government's mini-budget has raised alarm among investors.

The chancellor promised huge tax cuts without specifying how he would fund them.

The prime minister's spokesperson said she remained "in confidence" that her plans would spur growth and that she was in regular contact with the bank.

On Monday, in a bid to reassure investors, Chancellor Quasi Quarteng said he would bring forth his economic plan, where he would explain how he plans to pay for tax cuts and an independent forecast on the UK economy's prospects. provide.

Earlier the bank also said it was ready to double the amount of bonds it was buying to help support its price, but reiterated that it would end this support as planned on Friday.

Despite these actions, the government's borrowing costs rose sharply as investors were wary of buying bonds.

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Treasury Shadow Chief Secretary Pat McFadden said the fact that the bank was forced to run for a second day created "new pressure for the chancellor to reverse his budget".

The government raises the money needed to be spent by selling bonds to investors. The bank first stepped in on September 28, when, days after the mini budget, investors began demanding higher rates of interest on those bonds, and government borrowing costs rose to worrying levels.

Market turmoil had forced pension funds to sell bonds due to their solvency concerns, but this risked a collapse in bond prices as more were unloaded and some pension funds collapsed. had left close.

By buying the bonds, the bank is hoping to help stabilize their prices and prevent investors from selling them.

The turmoil has fed the mortgage market, where hundreds of products have been suspended due to concerns about the price of these long-term loans.

Last week, interest rates on normal two- and five-year fixed rate mortgages exceeded 6% for the first time in a decade.



Under pressure from its lawmakers to change course, the government has been forced into a series of embarrassing climbs.

Among other things, it had to make a U-turn on its promise to do away with the top rate of income tax.

On Tuesday, the Institute for Fiscal Studies (IFS) think tank warned that Mr Quarteng will have to take a "large and painful cut" of up to £60bn to balance the books when he announces his economic plan on 31 October.

Mr Quarteng will question MPs this afternoon in the Commons for the first time since being appointed.



"A material risk to the financial stability of the UK" are terms the Bank of England rarely uses, warning of a threat to the financial system that it cannot confidently ignore. It is even more rare for many senior bank executives that some of the blame for the turmoil may lie at the government's doorstep, a result of domestic policy.

They are not alone. The sharp rise in the new government's cost of borrowing - the interest on those bonds - reflects a concern among investors that its tax-cutting plans risk overstretching the UK itself. And it is pension funds and borrowers who are vulnerable to the fallout.

It is the bank itself – again, a rare occurrence – that had to try to ease its pain. But it has been made clear that the drug is a stop gap – and the market's uneasiness continues to emphasize what it ultimately sees as the source of its uneasiness for a remedy - the chancellor's view -.

The solution to this crisis of trust will ultimately depend on what the Chancellor reveals in his Halloween plan. If IFS is correct, the cost of restoring credibility could include cutting public spending by more than £60bn.



Explaining its intervention on Tuesday, the Bank of England said government bonds had seen "significant re-pricing" since the start of the week and warned that markets were at risk of a new decline.

It said it would now buy a wider range of bonds as well as continue to buy bonds as part of the original emergency measures introduced on September 28.

Sir John Give, a former deputy governor for fiscal stability at the bank, said the bank was taking steps primarily to protect pension funds, many of which hold government bonds as investments.

However, he said the "underlying problem" was that markets did not believe the government would be able to cut spending before its growth measures took effect.

The underlying problem arose after the announcement of a large amount of additional borrowing

The underlying problem came without a declaration of large amounts of additional borrowings and a clear plan to pay for them," Sir John told the BBC.

"And the latest speculation on that is that [Mr. Quarteng] will have to promise [billions] of spending cuts in order to balance the books. That's one thing to say, but can he really do it?"

Prime Minister Liz Truss has said the promised tax cut of around £43bn will boost UK economic growth and will therefore pay for itself.

The chancellor has also committed to publishing his economic plan as well as an independent forecast of the UK's economic prospects by the OBR, the independent budget watchdog, on 31 October – something he refused to do with his mini-budget .

But Ms Truss faced potential backlash from her lawmakers as she declined to say whether she would increase inflation in line with inflation next April.

It is believed that raising wages in line with benefits instead could save the government £5bn.