IN a very uncommon move, the Bank of England has committed to spending £65 billion over the next two weeks in the UK Bond Market, in order to counter the effects in the market since the mini-budget last Friday.
As one Conservative MP said (albeit someone who is not a Trussite), “The Bank of England is saving the UK economy from the policies of the UK Government.”
Since the mini-budget on Friday, which announced tax cuts without any clear indication of how these would be paid for, interest rates on UK Government borrowing lept from around 1% in January to nearly 5% yesterday. This is due to lack of confidence in the government’s policies.
The first few paragraphs of this article (https://news.sky.com/story/bank-of-england-takes-action-to-restore-orderly-market-conditions-after-mini-budget-panic-12706827 ) explain what the Bank of England did yesterday:
“The Bank of England has launched a temporary bond-buying programme as it takes emergency action to prevent "material risk" to UK financial stability.
It revealed that it would buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets in the wake of the mayhem that followed the government's mini-budget last Friday.
In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds - essentially IOUs.
That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the government’s finances.”
This article (https://www.theguardian.com/business/2022/sep/28/what-bank-of-england-doing-pound-dollar-uk-economy-interest-rates-bonds?CMP=Share_iOSApp_Other ) has a good more advanced explanation of the aims of the Bank of England’s actions.
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