Bank of England announces emergency action to try to calm markets

Central bank tries to stave off ‘material risk to UK financial stability’

The Bank of England has announced that it will intervene in an attempt to calm markets after they were spooked by last week’s mini-Budget by the Liz Truss government.

The central bank said it was launching an emergency programme to buy up government bonds in a bid to stave off a “material risk to UK financial stability”.

It comes a day after chancellor Kwasi Kwarteng vowed to push on with the government’s radical borrowing-fuelled £45 billion tax cut spree, despite growing calls to change course.

Only hours later the IMF issued an extraordinary rebuke of his and Ms Truss’s tax plans, urging a rethink and saying the strategy would “increase inequality.”

The Bank said it was stepping in to buy 10-year government bonds – known as gilts – at “urgent pace” after fears over the budget sent the pound tumbling and sparked a sell-off in the bond market.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the Bank stated. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

The Treasury said the central bank was responding to “dysfunction in gilt markets” and was acting to restore “orderly market conditions”. A spokesperson said the operation was “fully indemnified” by the Treasury.

According to Sky News, the Bank of England decided to intervene as a response to the risk of run on UK pension funds, in a bid to prevent “mass insolvencies”.

The Bank could shell out more than £60bn on the bonds, announcing that they would spend £5bn at weekday auctions until 14 October. The Resolution Foundation think tanks said it was effectively a round of “temporary extra quantitative”.

Susannah Streeter, senior analyst at Hargreaves Lansdown, said the move “smacks of a bit of panic and also of frustration that the government appears to be digging in its heels, reluctant to perform a political U-turn”.

The emergency announcement appeared to calm the bonds market. The interest rate on the 10-year UK government bond fell from 4.5 per cent to 4.1 per cent, while the 30-year rate fell from 5 per cent to 4.2 per cent.

However, the pound – which had been holding steady – fell sharply again following the Bank of England’s emergency move on bonds. It fell 1.6 per cent to trade against the dollar at $1.05 – close to the all-time lows seen at the beginning of the week.

The government denied suggestions that Mr Kwarteng had pleaded with investment banking chiefs not to bet against the pound at a meeting on Wednesday morning.

Meanwhile, the Bank of England’s former deputy governor has warned the the austerity cuts looming if the  government does not reverse course on the economy could result in the end of the NHS.

Sir Charlie Bean said it would be better to “get a Tardis and go back” and undo Mr Kwarteng’s mini-Budget, warning of possible public spending cuts of up to £50bn a year. “Frankly, the only way you can really deal with this is with a very fundamental rethinking of the boundaries of the state,” he told Sky News.

Liz Truss and Kwasi Kwarteng (Reuters)

On the crisis that could pose to the NHS, the expert said: “So if you want to get the share of government spending to GDP down, you have to be prepared, say, to move away from our own health service, which is free at the point of delivery, to one funded by social insurance like they do in Germany.”

Paul Johnson, director at the independent Institute for Fiscal Studies (IFS) think tank, said the government may have to freeze spending on public services five years as part of the chancellor fiscal plan.

Mr Johnson told BBC Radio 4’s The World at One: “If I had to guess now what that plan might look like, I would suggest that it will be that [Mr Kwarteng] will look five years into the future and he’ll say ‘I’m going to freeze spending over the whole of that five-year period’.”

Sir Charlie said that despite Wednesday’s intervention, interest rates will still likely need to rise – suggesting a base rate hike of another 1.5 percentage points. “The need for an immediate rate increase is much reduced. It is not going to go away though,” he told the BBC.

Labour leader Keir Starmer said parliament should be recalled after the Bank of England’s emergency intervention. Sir Keir said the IMF rebuke to UK economic policy was “very, very serious” and urged the government to urgently change course from its “self-inflicted wound”.

Liberal Democrat leader Ed Davey MP said Ms Truss had “24 hours” to explain how she would “fix this economic disaster” and prevent people losing their homes from rising interest rates.

“Every hour the prime minister and chancellor hide from this economic nightmare increases the chances of interest rates spiralling out of control and people losing their homes,” said Sir Ed, repeating his call for a recall of parliament.

Scotland’s first minister Nicola Sturgeon also said the Commons should be recalled to address the “rapidly deteriorating economic crisis”. The SNP leader said the emergency intervention by the Bank to “reduce damage” from the Truss government’s policies was “extraordinary”.