LONDON — The Bank of England on Wednesday announced highly unusual market intervention in hopes of slowing the rush to sell sterling and UK bonds that began after new Prime Minister Liz Truss announced her pivotal economic plan.
The central bank said it would temporarily buy UK government bonds, a notable move that follows the government’s announcement on Friday of its so-called “mini-budget”.
“Should dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability,” the Bank of England said in a statement.
The bank said the purchases to “restore orderly market conditions” would be made “to the extent necessary to achieve that outcome”. It also said it was limited to two weeks.
The British pound falls to an all-time low against the dollar after taxes were cut
Truss, who has been in office for just three weeks, is trying to transform the UK economy with bold – some would say risky – moves that have scared investors. Truss has made no secret of her views on the free market. During the leadership campaign to replace Boris Johnson as Prime Minister, she said she would be a tax-cutter from the start.
On Friday, she made good on that promise when the government announced huge tax cuts and a big increase in borrowing. Plans include removing the top income tax rate of 45 percent for people earning more than £150,000 and removing the cap on banker bonuses.
Markets delivered their premature judgement: Sterling fell to an all-time low against the US dollar on Monday, falling as low as 1.03 before recovering somewhat. Some economists have said the pound could fall to par with the dollar.
The pound slipped back to 1.06 on Wednesday morning after hitting 1.08 on Tuesday.
“This is a self-inflicted wound, unlike other swings in the market,” opposition Labor Party leader Keir Starmer told the BBC on Wednesday morning. According to a recent YouGov poll, his party is up 17 percentage points. This is the party’s biggest lead over the Conservatives since 2001, when Labor leader Tony Blair won a landslide victory.
Truss has to call general elections by January 2025 and is keen to put her ideas on the economy into action.
On Tuesday, the International Monetary Fund issued a rare rebuke about the new UK government’s handling of its economic policies.
In an unusually blunt statement, she said she was “monitoring the situation closely” in Britain, adding that the government’s plans were likely to “increase inequality”. Untargeted fiscal packages are not recommended in times of high inflation.
Truss and her chancellor, Kwasi Kwarteng, have defended their vision for the economy.
“They are willing to risk unpopularity because they think it will work in the long run,” said Tony Travers, a professor of politics at the London School of Economics.
He noted that unlike some of her Conservative Party predecessors, including Johnson and Theresa May, Truss had fairly straightforward views on the free market. Her government wants to “make Britain a lower-tax, more flexible economy that competes head-to-head with high-paid workers and talent in the EU and globally.”
“Whether it works or not, only time will tell,” he said, adding, “if it survives in the short term, time will tell sooner.”