Bank of England steps in to stabilize the market and control the fall of the pound

On Wednesday 28 September, the British central bank took emergency action by announcing the purchase of long-term government bonds to stabilize the falling market. In addition, it decided to postpone the start of its gilt sales program until next week.

Bank of England Provides Market Forecast

The Bank of England said the purchases were essential to restore older market conditions. The British central bank said:

“If the dysfunction in this market were to continue or worsen, there would be a significant risk to UK financial stability. This would lead to an unwarranted tightening of funding conditions and a reduction in the flow of credit to the real economy. Purchases will be made on the scale necessary to achieve this outcome.”

Following the Bank of England’s action, the 30-year yield fell 20 basis points on Wednesday. The British central bank also said it remains committed to reducing its £838 billion of government securities by £80 billion over the next year. However, due to market conditions, it will delay the start of gilt sales.

When market conditions stabilize again, the BoE plans to resell the gilts. “These purchases will be strictly limited in time. They are intended to solve a specific problem in the long-term government bond market“, she adds.

The British pound collapses

Britain’s pound sterling has plummeted against the U.S. dollar, hitting new historic lows. In early trading on Thursday, September 29, the pan-European Stoxx 600 index fell 1.7% and the British pound lost another 1% to trade around $1.078.

Prime Minister Liz Truss and her chancellor Kwasi Kwarteng unveiled a mini-budget when they took office earlier this month. Her government’s plans to cut taxes, particularly for the UK’s highest earners, sent shockwaves through the financial markets, causing the pound to fall. Analysts argued that this would fuel already high inflation and increase economic inequality.

The International Monetary Fund (IMF) chastised the British government, asking it to reassess its plan. Rebecca McDonald, the chief economist of the Joseph Rowntree Foundation, said:

“Millions of people across the UK will find this winter incredibly difficult financially. These people have had to watch the chancellor cut taxes for those who are better off – it was incredibly hard to hear.”

With regard to the current actions of Liz Truss’ government, Britons have expressed major concerns with diminishing confidence in the Prime Minister.