Bank of England expands measures on UK ‘financial stability’ concerns

The Bank of England is responding to high UK bond yields since the government unveiled debt-driven tax cuts
London (AFP) – The Bank of England unveiled, on Tuesday, further measures aimed at calming markets shaken by the United Kingdom’s budget, as it warned of risks to the country’s financial stability.

The week has already seen action by the Bank of England and the UK government aimed at calming the bond markets in particular with higher government borrowing.
The moves are in response to rising British bond yields and after the pound has fallen to a record low against the dollar since Prime Minister Liz Truss’ new government unveiled debt-driven tax cuts in last month’s budget.

A day after it launched a temporary easing aimed at easing liquidity pressures, the central bank said on Tuesday it was expanding the range of daily purchases of British government bonds, or gold bonds, until Friday.
In a statement, the Bank of England said the latest action would “serve as an additional pillar of restoring orderly market conditions”.

He noted that “the beginning of this week saw another significant re-pricing of British government debt, especially index-linked securities,” which the central bank will now buy as part of its broader bond-buying operation.

It added that “the dysfunction of this market and the potential for reinforcing ‘quick selling’ dynamics poses a material risk to the UK’s financial stability.”
The Bank of England’s intervention on Tuesday led to a slight drop in yields, while the pound stabilized against the dollar.

“The main sticking point is that the support measures are only set to last until Friday,” AJ Bell’s chief investment officer, Ross Mold, noted.
“Its extension could go one of two ways – either the market applauds the move and breathes a sigh of relief or becomes more anxious, believing that the extra time indicates that the crisis is more severe than originally thought.”

– Low unemployment –
In some positive news, official data on Tuesday revealed that British unemployment fell to a 50-year low of 3.5 per cent.
However, wages continue to be eroded by decades of high inflation that threatens to push Britain into recession.

The British government on Monday brought forward its key growth and inflation forecasts to Halloween, hoping not to scare markets further.

Finance Minister Kwasi Quarting will unveil Britain’s debt reduction plans and economic forecast on October 31 rather than late November.

It comes after Kwarteng has already had to scrap the tax cut for the richest earners, in the face of anger as millions of Britons face a cost-of-living crunch with UK inflation running at around 10%.

– ‘Painful wounds’ –

Meanwhile, Britain faces “significant and painful” cuts in public spending to overhaul the country’s public finances if it decides not to make any further volatility around tax cuts, a leading think tank warned on Tuesday.
“In a weaker economy, putting government finances on a sustainable path without eliminating tax cuts could force … significant and painful spending cuts,” the Institute for Fiscal Studies said in a study.

Debt reduction “by cutting spending alone, without deciding which budgets to cut, risks a naivety reaching breaking point,” she added.

The budget has been widely criticized, including by the International Monetary Fund, over fears of ballooning government debt to pay for tax cuts, including salaries for all UK workers.
Last week, Fitch lowered its outlook for UK government debt from stable to negative.

The Bank of England increased further pressure by raising its key interest rate to a 14-year high of 2.25 per cent in a bid to cool inflation – which is expected to strengthen upon tightening next month.
This, in turn, has seen retail banks raise interest rates on their mortgages, with analysts anticipating a significant drop in property prices.