The Bank of England on Wednesday made an emergency intervention to protect Britain’s “financial stability” after Kwasi Kwarteng’s shock mini-Budget.
The dramatic move came at 11am, as the pound continued to fall and as top bankers had been meeting the Chancellor as he sought to defuse the economic crisis sparked by last week’s fiscal statement.
The Bank said it would buy back billions of pounds of Government debt to try to drive down the interest rate on public borrowing which has soared since the fiscal statement on Friday. It stressed that it was also seeking to protect households and businesses from the crisis, who also face spiralling mortgage and other borrowing costs.
In a statement, the Bank said: “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses. To achieve this, the Bank will carry out temporary purchases of long-dated UK Government bonds from September 28. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.”
The Treasury insisted the “purchases will be strictly time limited, and completed in the next two weeks.”
As the UK economy was reeling from the mini-Budget:
- Senior bankers including from JP Morgan and Bank of America were meeting Mr Kwarteng at the Treasury.
- Overnight, there was a record drop in the choice of mortgage products. Moneyfacts.co.uk said 935 fewer residential mortgage products were on the market on Wednesday compared with Tuesday. This is the highest fall on the financial information website’s records going back to November 2011.
- More lenders were expected to pull mortgages amid the uncertainty over how far the Bank of England would hike interest rates to control inflation.
- Many homeowners were braced for their mortgage payment bills to shoot up, significantly worsening the cost-of-living crisis already being fuelled by sky-high inflation.
- Renters were fearful they could end up paying more as landlords have to pay higher mortgage bills.
- Property experts were warning house prices could crash by 10 or even 15 per cent next year.
- Credit rating agency Moody’s said large unfunded tax cuts were “credit negative” for the UK.
- Former M&S chief Lord Rose said “we are in a jam, a pickle and a stew”, adding: “Business likes a clear runway.”
- The mini-Budget was threatening to overshadow the Tory annual conference in Birmingham which starts on Sunday.
- Polling guru Sir John Curtice suggested recent surveys could point to the fiscal statement, which has been dubbed “Kami-Kwasi”, potentially having opened the door to a Labour overall majority at the next general election.
- The BoE chief economist, Huw Pill, has said that a “significant monetary response” may be required, but signalled this would not come until the Monetary Policy Committee meets in November.
The Chancellor has sought to convince City investors he has a “credible plan” to start reducing the UK’s debt mountain.
But the IMF, the world’s lender of last resort, said in a statement: “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.”
In an apparent reference to the abolition of the 45p rate of income tax for people on more than £150,000, it added: “Furthermore, the nature of the UK measures will likely increase inequality.”
It urged Mr Kwarteng to change course when he comes back to Parliament in November with a package intended to show how he will get the public finances back on track with more targeted measures. The Treasury responded by saying that it had “acted at speed” to protect households and businesses through this winter from the soaring cost of gas and oil triggered by Vladimir Putin’s invasion of Ukraine.
It added: “We are focused on growing the economy to raise living standards for everyone and the Chancellor has announced he will publish his Medium-Term Fiscal Plan on November 23 which will set out further details on the Government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium term.” But Jim Reid, research strategist at Deutsche Bank, described the IMF “rebuke” as “quite scathing”.
Moody’s warned that a “large unfunded fiscal stimulus “ threatened to “prompt more aggressive monetary policy tightening, weighing on growth in the medium term”. It added: “A sustained confidence shock arising from market concerns over the credibility of the Government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability.”
Labour’s Sir Keir Starmer told LBC Radio: “The IMF statement is very serious and shows just what a mess the Government has made of the economy. And it’s self-inflicted.”
Many lenders including Halifax and Skipton have pulled or repriced their mortgage offers in the past few days with Yorkshire Building Society and Santander becoming the latest to withdraw deals from the market on Tuesday.
