AP

UK markets roiled after bank rules out extending help

Oct 12, 2022, 12:41 AM | Updated: 1:46 pm

The Bank of England stands in the financial district of The City of London, Wednesday, Oct. 12, 202...

The Bank of England stands in the financial district of The City of London, Wednesday, Oct. 12, 2022. The pound sank against the dollar early Wednesday after the Bank of England governor confirmed the bank won't extend an emergency debt-buying plan introduced last month to stabilize financial markets.(AP Photo/Alberto Pezzali)

(AP Photo/Alberto Pezzali)

LONDON (AP) — Britain’s economy faced new shocks Wednesday after the Bank of England ruled out extending an emergency debt-buying plan – and the Conservative government appeared to blame the independent central bank for the U.K.’s economic turmoil.

Prime Minister Liz Truss came under more pressure from her Conservative Party to abandon the tax-cutting economic package that sparked the market instability. Tory lawmaker Mel Stride, who heads the House of Commons Treasury Committee, said only a “clear change in tack” from the government would reassure the markets.

The pound currency sank against the dollar again and the cost of government borrowing rose after Bank of England Governor Andrew Bailey confirmed that a program to buy government bonds, introduced last month to stabilize financial markets, will end Friday as scheduled.

“My message to the (pension) funds involved – you’ve got three days left now. You have got to get this done,” Bailey said late Tuesday in Washington, where he is attending the annual meeting of the Institute of International Finance.

Analysts say pension funds had lobbied England’s central bank to extend the program by two weeks.

The pound fell by almost 1% to just below $1.10 after Bailey spoke, before rallying slightly after the Financial Times reported that the bank was, after all, prepared to keep buying bonds beyond the Friday deadline. The bank quashed that report, saying its “temporary and targeted purchases” of government bonds “will end on Oct. 14.”

The U.K. 30-year yield on British government bonds, known as gilts, passed 5% on Wednesday morning amid growing unease among traders. Gilt yields, which rise as prices fall, are back close to the levels which led to the bank’s intervention last month.

The central bank took emergency action after the British government on Sept. 23 announced plans for 45 billion pounds ($50 billion) in tax cuts without saying how it would pay for them. The announcement spooked financial markets and sent the pound plunging to a record low of $1.03 against the dollar.

The Bank of England intervened to prop up the bond market and stop a wider economic crisis that particularly threatened pension funds.

On Tuesday the bank broadened its intervention, saying it will now buy inflation-linked securities — which offer protection from inflation — as well as conventional government bonds as it seeks to “restore orderly conditions” in the market.

The market turmoil has caused pain for many Britons — especially prospective homebuyers, who have seen mortgage rates soar on the increased prospect of a big rate hike from the central bank next month.

It has also put intense political pressure on the new government led by Truss, who took office in early September with a promise to boost growth through tax cuts and deregulation.

Friction has grown between the Conservative government and the independent Bank of England. Business Secretary Jacob Rees-Mogg suggested Wednesday that market turbulence was primarily the result of the bank’s failure to raise interest rates as quickly as its U.S. counterpart, the Federal Reserve.

He said the market response was “much more to do with interest rates than it is to do with a minor part of fiscal policy.”

Many economists dispute that view and blame the government’s botched budget announcement for the mayhem. The announcement of 45 billion pounds of tax cuts — without an independent economic assessment from the Office for Budget Responsibility — came on top of a 60 billion-pound plan to cap energy prices to help shield homes and businesses from steep price rises driven by Russia’s invasion of Ukraine.

“You’ve got a sidelined financial watchdog, you’ve got lack of a medium-term fiscal plan, one of the largest unfunded tax cuts we’ve seen since the early 1970s — it was kind of the straw that broke the camel’s back,” said Sanjay Raja, chief U.K. economist for Deutsche Bank.

In an effort to ease concerns, Treasury chief Kwasi Kwarteng said Monday that he would release the government’s detailed fiscal plans on Oct. 31, three weeks earlier than scheduled.

But the government still hasn’t detailed how it will pay for its tax cuts, except to say faster economic growth will increase tax revenue. Many economists say deep public spending cuts are inevitable unless the government reverses some of its tax cuts.

Truss said Wednesday that she was sticking to her economic plans, but also would “absolutely” keep her pledge not to cut public spending. In the House of Commons, she defended her economic plans, saying “the major part of the mini-budget” had been the measures to limit people’s energy bills.

But opposition Labour Party leader Keir Starmer accused the government of going “on a borrowing spree, sending mortgage rates through the roof.”

Investors are concerned that the government’s plans will increase public debt and fuel further inflation, which is already running at a near 40-year high of 9.9%.

In more bad financial news, the Office for National Statistics said Wednesday that Britain’s economy contracted 0.3% in August, down from 0.1% growth in July, with manufacturing and consumer services both recording falls.

The office’s chief economist, Grant Fitzner, said that the U.K. economy also contracted over the quarter to August.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

The U.S. Supreme Court is seen, Thursday, Feb. 8, 2024, in Washington. The U.S. Supreme Court has h...

Associated Press

Supreme Court decision on Trump’s election status could come Monday morning

A SCOTUS decision could come Monday in the case about whether Trump can be kicked off the ballot over his efforts to undo his 2020 defeat.

17 hours ago

Republican presidential candidate former UN Ambassador Nikki Haley poses for a selfie after speakin...

Associated Press

Nikki Haley wins D.C. Republican primary, her first 2024 victory

Nikki Haley has won the Republican primary in the District of Columbia, notching her first victory of the 2024 campaign.

17 hours ago

An Apache group that has fought to protect land it considers sacred from a copper mining project in...

Associated Press

A US appeals court ruling could allow mine development in central Arizona on land sacred to Apaches

An Apache group that has fought to protect land from a copper mining project in central Arizona suffered a significant blow.

22 hours ago

On Friday, March 1, 2024, the U.S. Food and Drug Administration said yogurt sold in the U.S. can ma...

Associated Press

Eating yogurt may reduce risk of type 2 diabetes, FDA says

Eating at least two cups of yogurt a week might reduce the risk of type 2 diabetes, the U.S. Food and Drug Administration said.

1 day ago

Arizona will not approve new housing construction on the fast-growing edges of metro Phoenix that r...

Associated Press

Arizona Senate passes plan to manage rural groundwater, but final success is uncertain

A plan to manage rural groundwater passed the Arizona Senate amid concerns about the availability of sufficient water for future generations.

3 days ago

A woman pauses while shopping at a Kohl's store in Clifton, N.J., Jan. 26, 2024. On Thursday, Feb. ...

Associated Press

Federal Reserve’s preferred inflation gauge picked up last month in sign of still-elevated prices

An inflation gauge favored by the Federal Reserve increased in January, the latest sign that the slowdown in U.S. consumer price increases is occurring unevenly from month to month.

4 days ago

Sponsored Articles

...

Midwestern University

Midwestern University Clinics: transforming health care in the valley

Midwestern University, long a fixture of comprehensive health care education in the West Valley, is also a recognized leader in community health care.

...

Collins Comfort Masters

Here’s 1 way to ensure your family is drinking safe water

Water is maybe one of the most important resources in our lives, and especially if you have kids, you want them to have access to safe water.

...

Sanderson Ford

The best ways to honor our heroes on Veterans Day and give back to the community

Veterans Day is fast approaching and there's no better way to support our veterans than to donate to the Military Assistance Mission.

UK markets roiled after bank rules out extending help