THE Bank of England (BoE) launched a huge intervention in government bond markets yesterday, as the UK financial crisis spiralled out of control following last week’s Tory mini-budget.
The Bank announced that it is buying government bonds to ‘restore orderly market conditions’, adding that ‘the purchases will be carried out on whatever scale is necessary to effect this outcome’ and warning that if market volatility continues there is a ‘material risk to UK financial stability’.
Overnight, the International Monetary Fund (IMF) issued a statement trashing the Tory government and its economic policy.
The IMF said: ‘We are closely monitoring recent economic developments in the UK and are engaged with the authorities.
‘We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
‘However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.
‘Furthermore, the nature of the UK measures will likely increase inequality.
‘The November 23 budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and re evaluate the tax measures, especially those that benefit high income earners.’
Chancellor Kwasi Kwarteng held emergency meetings with investment bank chiefs yesterday morning including JP Morgan’s chief executive in Europe, the Middle East and Africa, Viswas Raghavan, and Bank of America international president Bernard Mensah, both of whom ignored all questions from reporters as they walked into the Treasury.
The Bank bought ‘unlimited quantities of long-term debt’, with interest rates being charged to the UK government in these markets spiralling to 20-year highs.
The Treasury stated: ‘Global financial markets have seen significant volatility in recent days.
‘The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions.’
The Treasury was moved to emphasise that Chancellor Kwarteng is ‘committed to the Bank of England independence’.
‘The government will continue to work closely with the Bank in support of its financial stability and inflation objectives,’ it said.
The Bank said the operation will be fully indemnified by HM Treasury and that the purchases would be ‘time limited’.
‘The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September.
‘The purpose of these purchases will be to restore orderly market conditions,’ it said. ‘Auctions will take place from today until 14 October.’
In early trading the pound had dropped back 0.95% against the dollar to $1.0634 following the overnight criticism from the IMF of the UK’s mini-budget.
Economist Julian Jessop warned that the UK economy could end up in a ‘doom loop’ of failing currency and rising interest rates.
Global ratings agency Moody’s warned that it was no longer expecting UK economic growth to return fully until 2026, before cutting its forecasts for GDP growth next year to 0.3% from 0.9%.