Bank of England moves to calm bond market rout after tax cut storm

LONDON, Sept 28 (Reuters) – The Bank of England sought to quell the firestorm in Britain’s bond markets, saying it would buy as much government debt as needed to restore order after plans to cut debt new Prime Minister Liz Truss’ taxes sparked financial chaos.

Having failed to calm the sell-off with verbal interventions over the previous two days, Britain’s central bank on Wednesday announced the immediate launch of an emergency bond-buying program aimed at preventing the turmoil from spreading further. on the stairs.

“If the dysfunction of this market continues or worsens, there would be a significant risk to the financial stability of the United Kingdom,” warned the BoE.

Since Finance Minister Kwasi Kwarteng on Friday presented a plan to cut taxes on top of an energy bill bailout, all funded by a huge increase in government borrowing, UK mortgage markets have frozen, pension funds abandoned gilts and corporate borrowing costs soared.

A Treasury source said Kwarteng would not resign and the government would not reverse its policy. A second person familiar with the situation said Truss still backed Kwarteng and they would announce further economic reforms soon.

The BoE will now buy up to 5 billion pounds ($5.31 billion) a day of UK government bonds with a maturity of at least 20 years from Wednesday until October 14.

Her announcement, which represented a sudden reversal of the bond-selling plans she had accumulated since the 2008-2009 global financial crisis, immediately lowered borrowing costs.

The 30-year gilt yield saw its biggest decline since 1992. The pound pared its earlier losses to rise against the dollar. At $1.0860, it was up 1.2% on the day and down 11% over the past three months.

The BoE said it would return to its bond selling plan at the end of October.

But the political and economic shock waves that have triggered growing alarm in foreign capitals have continued to reverberate.

Kwarteng sought to reassure investment bank executives in a meeting that was described as nervous by attendees, and two senior BoE officials pulled out of public events scheduled for Wednesday and Thursday.

A source at the meeting said Kwarteng asked the gathered finance bosses what they could do to calm the markets.

“He didn’t put the problem on their knees for them,” the source said.

Investors and economists said the government’s plan to wait until November 23 to set out its full debt reduction policy, and the fact that the BoE’s next rate announcement is not expected until November November 3, seemed at odds with the market frenzy.

“Truss and Kwarteng now face a severe economic crisis as global financial markets wait for them to make policy changes that they and the Conservative Party will find distasteful,” said Mujtaba Rahman of Eurasia Group.

RESTORE ORDER

Kwarteng’s plans for deep tax cuts and deregulation to pull the economy out of a long period of stagnation have been seen as a return to the Thatcherite and Reaganomic doctrines of the 1980s.

But they have caused panic among some investors and concern among many lawmakers in the ruling Conservative Party.

Market pressures were such that pension plans were selling gilts to meet emergency collateral calls on underwater derivatives positions, or selling to reduce exposure because they couldn’t meet those cash calls. , said pension advisers.

“There are plans that are running out of cash right now,” a pensions consultant said ahead of the BoE’s intervention. Another person familiar with the decision confirmed that the BoE had moved due to problems with pension funds, the main holders of long-term gilts.

The BoE said the purchases were aimed at restoring orderly market conditions. “Purchases will be made on the scale necessary to achieve this outcome.”

Foreign government officials and international financial institutions have begun to publicize their criticisms.

In a rare intervention on a G7 country, the International Monetary Fund urged Truss to back down.

US bond giant PIMCO said it would have less confidence in the pound than before last Friday’s announcement.

Spain’s Economy Minister Nadia Calvino was more outspoken, calling the policy a disaster.

MARKET FRENZY

So far, the government has refused to budge.

Kwarteng, an economic historian who served as business minister for two years and a free trader out of conviction, insisted that tax cuts for the wealthy as well as support for energy prices are the only way to revive long-term economic growth.

The turmoil in the markets and the ensuing alarm among Tory lawmakers will put enormous pressure on him and Truss, who was elected by the party’s roughly 170,000 members, not the wider electorate. The party is holding its annual conference next week.

Conservative lawmaker Simon Hoare, who backed Truss rival Rishi Sunak for the leadership, blamed the government and the Treasury for the policies that sparked the market rout.

“They were written there. This inane madness cannot continue,” he said.

The mortgage market is an area of ​​immediate concern for politicians, after lenders withdrew record numbers of offers and anecdotal reports suggested people were struggling to make or change mortgage deals.

A crash in the housing market would mark a major shock in a country where rising house prices have for years conveyed a sense of overall wealth and homebuyers have grown accustomed to more than a decade of falling rates. interest at rock bottom.

The intervention of the IMF is also of symbolic importance in Britain: its bailout in 1976 following a balance of payments crisis forced huge spending cuts and was long considered a humiliating low point in the modern economic history of the country.

Written by Kate Holton; Additional reporting by Elizabeth Piper, William James, Dhara Ranasinghe, Carolyn Cohn, Sachin Ravikumar, Paul Sandle, Muvija M and William Schomberg in London and Emma Pinedo Gonzalez in Madrid; Editing by Alex Richardson, Toby Chopra, William Schomberg and Catherine Evans

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