BoE intervenes as IMF criticises UK budget

Published September 29, 2022
A pigeon stands in front of the Bank of England in London, Britain, April 9, 2018. — Reuters/File
A pigeon stands in front of the Bank of England in London, Britain, April 9, 2018. — Reuters/File

LONDON: The Bank of England stepped in on Wednesday to shore up market confidence after the International Monetary Fund criticised Britain’s inflation-fighting budget.

In a surprise move, the BoE announced it was temporarily buying up long-dated UK government bonds “to restore orderly market conditions”.

The pound promptly slu­m­ped 1.7 per cent to $1.0552 before clawing back ground.

There was respite elsewhere, with the UK government’s 30-year bond yield retreating to 4.44pc, having hit a 1998 peak at 5.14pc.

The BoE intervention followed criticism on Tues­day from the IMF, which argued that Britain’s bud­get could increase inequality and worsen inflation.

Credit ratings agency Moody’s also waded in overnight with a warning about soaring debt.

“So, the Bank of England finally intervenes after com­ing under so much pressure to act,” said City Index analyst Fawad Razaqzada.

“The BoE’s intervention is an attempt to soothe investor nerves after they were spooked by last we­­ek’s mini-budget.” Finance minister Kwasi Kwarteng’s big tax cuts and energy price freeze, aimed at boosting the UK’s recession-threatened economy, appeared to have had the opposite effect as traders warn of ballooning debt to pay for the incentives.

Following last Friday’s budget, UK bond yields soared and the pound hit a record low at $1.0350, perilously close to parity.

In a highly unusual intervention, the IMF late Tuesday said it was “closely monitoring” developments and urged the government in London led by new Prime Minister Liz Truss to change tack.

The Fund added: “We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

“However, given elevated inflation pressures in many countries... we do not recommend large and untargeted fiscal packages at this juncture.” The IMF said the “UK measures will likely increase inequality” and stressed the importance of fiscal policy not working “at cross purposes to monetary policy”.

Published in Dawn, September 29th, 2022

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