UK financial stability

The central bank warned of a «material risk to UK financial stability» from turmoil in the British government bond market, sparked by chancellor Kwasi Kwarteng’s tax cuts and borrowing plan last week. Economists warned that the injection of billions of pounds of newly minted money into the markets could fuel inflation. UK government bond markets recovered sharply after the announcement, but the pound fell, down 0.8 per cent against the dollar in afternoon trading in London to $1.064. However, the bank stressed it was not trying to lower long-term government borrowing costs.

At a meeting with the chancellor yesterday, bankers urged Kwarteng not to wait until a planned statement on November 23 to take action to calm the markets. Kwarteng attempted to reassure markets that he was serious about restoring order to the public finances by telling government departments to identify efficiency savings, reminding them they would have to live within very tight spending limits already set until 2025. Following the BoE intervention, opposition Labour leader Sir Keir Starmer called for parliament to be recalled and for Kwarteng to abandon his plans. The central bank took the emergency measures after Kwarteng’s fiscal package last week sent the pound tumbling and set off historic falls in gilt prices.

The BoE said its action would bestrictly time-limited and came after market participants said there was a «proper shit show» happening in government bond markets. The Treasury blamed the turmoil on «significant volatility» in «global financial markets». However, it added that Kwarteng was «committed» to BoE independence. Gerard Lyons, advising Liz Truss, Britain’s new prime minister, on economic strategy, said he had urged Kwarteng to keep financial markets and affordability in mind before cutting taxes.

Lyons said ministers «mustn’t say anything further to exacerbate the situation» and should stress parts of the government’s growth plan that did not involve unfunded tax cuts.

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