of bank of england This is a major intervention in financial markets after the new government’s fiscal plans have caused borrowing costs to skyrocket in the past few days.
The news brought some relief to bond markets, but the British pound fell again, falling 1.7% against the dollar to $1.05, returning to the record lows it hit on Monday.
The UK government’s plan to bolster economic growth through tax cuts, especially for high-income earners, while spending heavily to protect households from rising energy costs has been categorically rejected by markets and economists. era of rising interest rates and high inflation. The International Monetary Fund (IMF) unexpectedly released a statement on the UK economy on Tuesday, urging the government to “re-evaluate” its plans.
The decline in UK assets since Friday when the government’s plans were announced has particularly affected bonds with long maturities, the Bank of England said. It would pose material risks to the financial stability of the country,” it said in a statement. This would lead to a reduction in the flow of credit to businesses and households, he added.
“The purpose of these purchases is to restore orderly market conditions,” the central bank added in a statement, which had an immediate impact on the market. “Purchases are executed at the scale necessary to bring about this result.”
UK inflation rising
The bond auction will run from Wednesday through October 14th.
Yields on 10-year UK government bonds on Wednesday rose to 4.58% before the central bank’s statement. This is his highest since early 2008. The 30-year yield has crossed 5% for the first time since 2002.
Bond yields fell sharply after the announcement, with the 30-year yield dropping more than half a percentage point to around 4.35%.
The central bank’s statement echoes a famous promise made in 2012 by Mario Draghi as president of the European Central Bank to do “whatever it takes” to save the euro from severe market pressure. I’m here.
The intervention in Britain on Wednesday came after the Central Banking Commission warned of risks to the UK’s financial stability from a malfunctioning government bond market.
The UK government’s drastic financial plan, presented without an independent financial and economic assessment, has led investors to flee their UK assets. The pound fell to a record low against the US dollar on Monday, raising traders’ suspicion that the central bank would be forced to raise interest rates too quickly, pushing up short- and long-term borrowing costs.
The rapid rise in bond yields has disrupted the UK mortgage market, with some lenders pulling back on new mortgage offers because they have become too difficult to price.
“If the government decides to remove some of the tax cuts or cut spending significantly, it will ease stress in currency and bond markets,” Pantheon Macroeconomics economist Samuel Toombs said in a research report. It will help to “However, the actions taken so far have undermined global investor confidence, which cannot be easily restored.
Market turmoil and central bank interventions reveal the extent to which the government’s plans conflict with the banks’ monetary policy goals. Governments are trying to create economic demand quickly, while banks are trying to cool it down and keep inflation down.
Bank of England chief economist Hugh Pill said on Tuesday that the government’s fiscal plan would be met with a “significant” response by Bank of England officials due to meet again in early November.
Just last Thursday, the central bank announced plans to begin selling bonds back into the market in an attempt to end a long period of monetary easing in the fight against inflation. It said there were “high hurdles” for banks to deviate from the plan, which would reduce their holdings of bonds by £80bn to £758bn over the next year through sales and redemptions.Wednesday , the bank announced that it will postpone the start of sales until the end of October.