Bank of England intervenes to stabilize UK finances after Liz Truss budget

LONDON — The Bank of England on Wednesday announced a highly unusual market intervention in hopes of slowing the rush to dump pounds and UK bonds that began after new Prime Minister Liz Truss announced her centerpiece economic plan.

The central bank said that it would temporarily buy British government bonds, a remarkable move that follows the government’s announcement on Friday of its so-called “mini budget.”

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the Bank of England said in a statement.

The bank said that the purchases to “restore orderly market conditions,” would be “carried out on whatever scale is necessary to effect this outcome.” It also said it was time-limited to two weeks.

British pound falls to all-time low against dollar after taxes slashed

Truss, who is just three weeks into the job, is trying to change the British economy with bold — some would say risky — actions that have spooked investors. Truss has made no secret of her free-market views. During the leadership campaign to replace Boris Johnson as prime minister, she said that she would be a tax cutter from the get go.

On Friday, she delivered on that promise with the government announced huge tax cuts and a big jump in borrowing. The plans include the abolition of the top income tax rate of 45 percent for people earning more than 150,000 pounds and a scrapping of the cap on banker bonuses.

The markets gave their early verdict: On Monday, the pound sterling fell to an all-time low against the US dollar, slumping to 1.03 at one stage before recovering somewhat. Some economists have said that the pound could drop to parity with the dollar.

On Wednesday morning, the pound slide back to 1.06 after reaching 1.08 on Tuesday.

“This, unlike other fluctuations in the market, is a self-inflicted wound,” said Keir Starmer, leader of the opposition Labor Party, told the BBC on Wednesday morning. His party is up 17 percentage points, according to a recent YouGov poll. This is the party’s biggest lead against the Conservatives since 2001, when the Labor leader Tony Blair won a landslide victory.

Truss will have to call a general election by January 2025 and is keen to put her ideas on the economy into motion.

On Tuesday, the International Monetary Fund issued a rare rebuke of the new British government’s handling of its economic policy.

In an unusually blunt statement, it said that it was “closely monitoring” the situation in the UK, adding the government’s plans will likely “increase inequality.” Untargeted fiscal packages, it said, were not recommended during a period of high inflation.

Truss and her chancellor, Kwasi Kwarteng, have defended their vision for the economy.

“They are prepared to risk unpopularity because they think it will work in the long-term,” said Tony Travers, a politics professor at the London School of Economics.

He noted that, unlike some of his Conservative Party predecessors, including Johnson and Theresa May, Truss’s free market views were quite straightforward. Her government wants to “move Britain to be a lower tax, more flexible economy which competes head to head with highly paid workers and talent with the EU and globally.”

“Whether it works or not, only time will tell,” he said, adding, “whether it survives the short-term, time will tell sooner.”

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