The pound has fallen sharply against the dollar after Andrew Bailey warned the Bank of England would not extend its emergency intervention in financial markets beyond this week, after the turmoil sparked by the government’s mini-budget.
Sterling skidded by more than a cent against the dollar to below $1.10 after the Bank’s governor insisted the £65bn scheme to purchase UK government bonds would not be continued beyond the deadline on Friday.
Pensions industry leaders and one of the Bank’s former deputy governors had earlier called for an extension to mop up the ongoing bond market fallout triggered by Kwasi Kwarteng’s ill-received mini-budget last month.
The central bank had started the day by saying it would revamp the scheme’s bond-buying firepower – within the existing timeframe – for a second time in as many days, warning there were still “material risks” in government debt markets affecting UK pension funds.
However, it ended with Bailey saying the intervention must end this week, telling an event organised by the Institute of International Finance in Washington: “We have announced that we will be out by the end of this week. We think the rebalancing must be done.
“My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now. You’ve got to get this done.”
It comes after the International Monetary Fund added to pressure on Liz Truss’ government to U-turn on unfunded tax cuts announced in last month’s mini-budget, saying changes in policy would help calm jittery financial markets.
The Washington-based IMF said a shift in policy from Truss and her chancellor would “change the trajectory” of interest rates.
The IMF said the Bank and the Treasury were “like two people trying to steer a car in different directions” as it highlighted the turbulence in markets caused by the chancellor’s 23 September package. “That’s not going to work very well,” said the Pierre-Olivier Gourinchas, the IMF’s economic counsellor.
Threadneedle Street said on Tuesday morning it was taking action to prevent a “fire sale” of UK government bonds – or gilts – by pension funds caught out by the sharp increase in interest rates in the past two and a half weeks.
In the final week of the scheme, it announced it would add index-linked gilts – securities where the interest rate moves up and down with inflation – to its bond-buying efforts, in an attempt to smooth over febrile conditions in bond markets.
In its single biggest daily intervention since opening the scheme two weeks ago, the central bank said it purchased more than £3.3bn of UK government debt from global investors.
Borrowing costs on long-term government debt rose on Tuesday despite the Bank’s interventions, remaining at levels close to the peak seen in the market turmoil after the mini-budget.
Pensions industry bosses earlier said an extension until the chancellor, Kwasi Kwarteng, delivered his debt-cutting plans to the Commons on 31 October could be required. Sir John Gieve, a former Bank deputy governor for financial stability, had called for the scheme would be extended for at least a couple of weeks, while warning that turbulence was directly linked to the chancellor’s unfunded tax cuts.
“He’s actually got to now produce a set of projections which add up,” he said.
The IMF has welcomed Kwarteng’s decision to scrap plans to abolish the 45% income tax rate paid by those earning more than £150,000 and will make a fresh assessment of the UK after Kwarteng’s fiscal statement.
But concerns over the UK and the possible knock-on effects from the turmoil to other countries were voiced at press conferences to launch two flagship IMF publications – the world economic outlook (WEO) and the global financial stability review.
Gourinchas, who is responsible for the WEO, said fiscal policy – the tax and spending decisions made by the Treasury – should be aligned with actions taken by the Bank to bring inflation down from a near 40-year high.
The IMF had pencilled in a sharp slowdown in UK growth from 3.6% this year to 0.3% in 2023 before the mini-budget. Growth would be raised “somewhat” but at the expense of making the fight against inflation more complicated.
Tobias Adrian, the IMF’s financial counsellor, said some of the market reaction since 23 September had been “disorderly”, adding that a different fiscal policy would take pressure off the Bank.
“A change in fiscal policy would change the trajectory of interest rates going forward,” Adrian said.
“The change in fiscal policy changed the expectations of monetary policy and meant the Bank of England would have to raise interest rates that much more to bring inflation back to its mandated target.”
Asked whether the only way to solve the UK’s financial markets problems was to reverse the mini-budget, Adrian said: “A shift in fiscal policy would certainly change the trajectory in yields.”
Kwarteng announced £45bn of tax cuts plus energy price curbs for consumers and businesses in his mini-budget, and is working on new proposals designed to reassure markets that the government finances are sound.
Although the chancellor U-turned on plans to abolish the 45p rate of income tax on higher earners, he moved ahead on Tuesday with a cut in taxes on dividends worth £600m for wealthy investors.
Struggling households will however be forced to wait until the end of October to find out whether the government will give the green light to a rise in welfare payments in line with inflation, or whether they will be subject to a real-terms cut amid the cost of living crisis.
Kwarteng stressed to the Commons that “no decisions have been made”.
