The Bank of England announced it would launch a temporary UK government bond buying program as an emergency measure to avoid a “significant risk to UK financial stability”.
He said he would intervene in the bond market after a recent sell-off and a spike in bond yields.
In a statement, the Bank said: “If the dysfunction of this market continues or worsens, there would be a significant risk to the financial stability of the United Kingdom.
“This would lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to the real economy.
“In line with its objective of financial stability, the Bank of England stands ready to restore market functioning and reduce any risk of contagion to credit conditions for UK households and businesses.
“To achieve this, the Bank will make temporary purchases of long-term UK government bonds from September 28. The aim of these purchases will be to restore orderly market conditions.
“The purchases will be made on whatever scale necessary to achieve this result. The transaction will be fully indemnified by HM Treasury.”
Earlier the International Monetary Fund and ratings agency Moody’s slammed Britain’s new economic strategy as investors braced for more havoc in markets, which has already forced the Bank of England to promise “meaningful” action.
The rare intervention by the global lender of last resort has put additional pressure on new finance minister Kwasi Kwarteng to reassess a policy that has caused a collapse in the value of UK assets and driven up the cost of British and European loans.
It also wreaked havoc on the mortgage market, prompting warnings of a sharp drop in house prices.
At the start of trade in London today, the pound was down 0.5% at $1.067.
Yields on UK 20- and 30-year government bonds rose above 5% to multi-year highs as the country’s debt sell-off extended into a fourth day of trading.
The latest crisis to hit the British state was sparked on Friday, when Kwarteng and Prime Minister Liz Truss outlined their vision of a return to Thatcherite and Reaganomic doctrines with deep tax cuts and deregulation to exit the economy from years of stagnant growth.
The IMF said the proposals, which sent the pound to an all-time low of $1.0327 on Monday, would likely increase inequality.
“Given the high inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal programs at this stage, as it is important that fiscal policy does not work against the grain of the monetary policy,” an IMF spokesman said.
Jim Reid, research strategist at Deutsche Bank, called the “reprimand” “rather scathing”.
In a stark statement, Moody’s said deep unfunded tax cuts were “a negative credit” for Britain.
“A sustained shock to confidence stemming from market concerns about the credibility of the government’s fiscal strategy, which has led to structurally higher funding costs, could more permanently weaken UK debt affordability” , Moody’s said.
The IMF is of symbolic importance in British politics – its 1976 bailout of Britain following a balance of payments crisis forced huge spending cuts and was long seen as a humiliating low point in the modern economic history of the country.
The IMF said an expected budget from Kwarteng on Nov. 23 would provide “a first opportunity for the UK government to consider ways to provide more targeted support and to reassess tax measures, particularly those that benefit high-income earners. “.
The UK Treasury Department said the November announcement would detail the government’s plans to reduce debt over the medium term.
With markets in turmoil and lawmakers from the ruling Conservative Party increasingly anxious, Kwarteng has spent the past few days talking to bosses in banking, insurance and finance and will do so again today.
“We are focused on growing the economy to raise living standards for everyone,” a spokesperson said.
Bank of England chief economist Huw Pill said yesterday the bank was likely to propose a “significant” rate hike at its next meeting in November, adding that turmoil in financial markets would have an impact important on the economy and would be taken into account in its next forecasts.
UK government bonds have sold off at a ferocious pace in recent days, with 10-year borrowing costs on track for their biggest monthly rise since at least 1957, according to a Reuters calculation.
“It’s hard not to draw the conclusion that this will require a meaningful monetary policy response,” Huw Pill told the CEPR Barclays Monetary Policy Forum.
Additional Report AP
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