The Bank of England intervenes to ensure ‘financial stability’ in the United Kingdom. The British central bank will temporarily buy government bonds to prevent interest rates on those loans from skyrocketing. The bank has this on Wednesday announced in a press release.
The financial markets have been unsettled since the new government of Prime Minister Liz Truss announced budget plans on Friday. Kwasi Kwarteng, Truss’ finance minister, announced £45 billion in tax cuts. It was previously announced that 150 billion pounds (165 billion euros) will be taken to curb energy costs for households and businesses. Investors fear that these measures are unaffordable and fuel inflation. The British pound took a nosedive and yields on British government bonds skyrocketed. The latter has caused acute problems in recent days for pension funds, among others, which have seen the value of their bond investments plummet.
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Peak inflation
The Bank of England will now “temporarily” buy British government bonds, according to its statement, in order to lower interest rates. The central bank was actually just about to sell bonds. She has been placed in a very difficult position by the government. The Bank of England wanted to raise interest rates to tame the spike in inflation. Now she must help the government out by curbing government bond yields.
On Tuesday, the International Monetary Fund strongly criticized Britain’s budget plans. According to the fund, the Truss administration should “reconsider” it.
In response to the intervention of the Bank of England, yields on British ten-year government bonds fell from around 4.5 to more than 4 percent on Wednesday afternoon. The pound fell from just under $1,070 to $1,055.