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BoE Announces Buying Government Debt to Ease Market Chaos

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The Bank of England announced today that it will be buying up long-term government debt in an effort to alleviate the market chaos that threatens to spark a financial collapse.

In a highly unusual move, Threadneedle Street said it will step in after the “significant price overhaul of UK and global financial assets” since Kwasi Kwarteng’s tax cuts.

“This price review has become more important in the past day and mainly affects long-term UK government debt. If the dysfunction in this market were to continue or worsen, there would be a material risk to the UK’s financial stability,” the statement said.

“This would lead to an unjustified tightening of financing conditions and a reduction in the flow of credit to the real economy.”

There was concern that pension funds were grappling with the massive shifts in government bonds coupled with the pound’s decline, with some saying they were urgently raising capital.

Commenting on the announcement, the Treasury Department said that “global financial markets have seen significant volatility in recent days.”

“These purchases are strictly time-limited and will be completed in the next two weeks. To enable the Bank to carry out this financial stability intervention, this operation has been fully reimbursed by HM Treasury,” a statement said.

The Chancellor is committed to the independence of the Bank of England. The government will continue to work closely with the Bank to support its objectives for financial stability and inflation.”

The pound had regained ground after hitting an all-time low of just $1.03 on Monday, but fell again this morning after the IMF criticized the “big and untargeted” fiscal package.

Earlier, there was anger at the IMF urging Mr. Kwarteng to reverse his tax cuts in his next mini-budget on November 23.

Meanwhile, White House economic adviser Brian Deese said he wasn’t surprised by the response — he warned the policy meant interest rates were more likely to rise.

“In a monetary tightening cycle like this, the challenge of that policy is that it actually puts the monetary authority in a position to potentially tighten even more. I think you saw that as a reaction,’ he said.

‘It is especially important to keep a focus on fiscal prudence, fiscal discipline.’

The feverish atmosphere was underlined by credit rating agency Moody’s who warned that the fiscal package would “permanently weaken the affordability of Britain’s debt”.

Mr Kwarteng tried to calm the nerves on the conservative benches last night in a talk with dozens of MPs, emphasizing the need for ‘cool heads’ and saying the government can ‘get through this’.

And some senior Tories have argued that the pound’s decline has in fact been triggered by alarms that Labor could soon be in government.

With Keir Starmer up 17 points in polls, former MEP Lord Hannan wrote on the ConservativeHome website: ‘What we’ve seen since Friday is partly a market adjustment to the greater likelihood that Sir Keir Starmer will win in 2024 or 2025 – leading to to higher taxes, higher spending and a weaker economy.’

Kwasi Kwarteng Later Meets Investment Banks After His Tax Cuts Scared Traders

The currency had rebounded after hitting an all-time low of just $1.03 on Monday, but fell again this morning after the IMF criticized the ‘big and unfocused’ fiscal package

Sterling fell to $1.06 this morning after recovering to $1.08 yesterday.

Fears are growing that the currency will equal the dollar unless the UK government can stop the shift.

The dollar has been extremely strong globally, but the pound has struggled even against that backdrop.

The IMF’s intervention was met with fury within the Treasury after a day when markets had calmed down and some government bonds had risen.

Tory veteran John Redwood said: ‘The IMF was wrong, as was the Bank of England, about the inflation they are rightly concerned about. They failed to warn us or the other central banks in the run-up to major inflation that the 2021 monetary policy was far too loose, interest rates far too low, and money printing out of control. Too bad they didn’t warn about that.

“Now they should be looking ahead. We should fight the recession. Of course we have to be careful with the finances. But the truth is that if the austerity policies have their way and we have a major recession, the loans will not decrease, but the loans will increase.’

Sir John put up a strong defense against Mrs Truss’ tax cut plan, while also sending a stern message to the Bank of England against further intervention on interest rates: “My message today is that the government is right to tackle the main threat for the year. We see a recession ahead, not inflation, because the good news is that all forecasters say inflation will fall sharply next year, and the sooner the better.’

Former cabinet minister Lord Frost, a close ally of Liz Truss, said the body has always supported “conventional” policies that had failed to boost growth.

He told the Telegraph that the prime minister and the chancellor just needed to “tone down” the criticism.

A Tory MP said: ‘Ultimately it is up to the elected government to set a budgetary strategy. I am confident that ministers will ensure a growing economy.’

Responding to the criticism, a spokeswoman for the Ministry of Finance said: “We acted quickly to protect households and businesses this winter and next winter, following the unprecedented surge in energy prices caused by the illegal actions of (Vladimir) Putin. in Ukraine.’

The government was “focused on growing the economy to raise living standards for all” and the Chancellor’s statement of November 23 “will provide more details on the government’s fiscal rules, including ensuring that debt is falls as a share of GDP’. .

Mr Kwarteng told City investors yesterday that he was “confident” that the biggest tax cuts in 50 years, of £45bn, will succeed.

He is expected to stress to investment bankers today that ministers are pursuing reforms to boost growth, including ‘Big Bang 2.0’ measures to cut red tape for the city.

The International Monetary Fund was told last night to keep its nose out of British affairs after it launched a scathing attack on the government's tax cut.

The International Monetary Fund was told last night to keep its nose out of British affairs after it launched a scathing attack on the government’s tax cut.

Meanwhile, there are mounting concerns about a mortgage crisis as the Bank of England prepares to raise interest rates.

Lenders have withdrawn dozens of products as they struggle to adapt to expectations of higher costs.

Investors have bet on interest rates to rise to 1.5 percentage points on or before the next meeting of the Bank of England’s Monetary Policy Committee in early November.

The bank’s chief economist, Huw Pill, warned Threadneedle Street “cannot remain indifferent” to developments in recent days, seen as a signal that the cost of borrowing will need to rise to protect the pound and contain inflation. to keep.

“It’s hard not to conclude that all of this will require a major monetary policy response,” said Mr Pill.

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