THE Bank of England has intervened in order to try and stabilise financial markets in the wake of steep falls in the pound against the dollar.
Earlier today, it announced it would launch a UK Government bond-buying programme on “whatever scale is necessary” as an emergency move.
Nicola Sturgeon has said the UK has not been in a more serious economic crisis in living memory including the global financial crisis in 2008.
Below, we breakdown what the bank has done and why.
What has the Bank actually done?
Officials at the Bank of England have said that it will use its money to effectively level funds to the UK Government.
It is hoped that this will help to bring down interest rates on government debt.
The Government raises money through IOUs, or bonds, which are purchased by investors on international money markets.
Consider the UK Government’s borrowing like billions of different mortgages. Some of these are paid off quickly whilst others take years.
The Bank of England has said it is worried about the interest rate on refinancing 10–30-year loans with the rate having doubled on the longer loans in recent weeks.
Loans are packaged as bonds and then sold and resold on the international market. The Bank of England hopes that by buying these up it will add to the number of purchasers.
This, in turn, should push up the value and indicate to other potential buyers that bonds are less risky to purchase, bringing the interest rate down.
Why is the Bank of England acting now?
The central bank was worried that a lack of stability and panic in the financial markets was resulting in the UK’s cost of borrowing increasing at an alarming rate.
It hoped the announcement of its intention to intervene would bring a sense of calm and help stabilise the market somewhat.
It is hoping to offer the government some respite from a financial situation which threatens to wreck plans for a £150 billion energy price cap and tax cuts worth up to £45bn.
However, Chancellor Kwasi Kwarteng is coming under increasing scrutiny to reverse some of the measures he announced in his mini budget including scrapping the top rate of income tax as well as the cap on bankers’ bonuses.
Will the plan work?
The Bank of England has said that the purchase of bonds was unlimited, but that it was only a temporary measure.
This is a signal to the UK Government that it needs to revise its tax-cutting measures or risk markets returning to the panicked selling seen earlier in the week when the pound fell to a record low against the dollar.
