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The Bank of England announces the purchase of British public debt to stop the collapse of the pound

2022-09-28T16:30:11.421Z

The IMF is leading the pressure on the British government to stop its tax cut. The currency continues to suffer downward pressure on its value this Wednesday



Second intervention of the Bank of England (BoE, for its acronym in English) so far this week to try to stop the collapse in the markets of the pound sterling.

If on Monday the British monetary authority issued an extraordinary statement in which it anticipated new increases in interest rates, this Wednesday it announced its intention to buy British bonds to help stabilize the value of the currency.

The statement brings to mind the

whatever it takes

(whatever it takes) of the former president of the European Central Bank, Mario Draghi, when he managed to stop the euro crisis at the beginning of the last decade.

"The Bank of England is prepared to restore the functioning of the markets and reduce contagion risks to the credit conditions of companies and households in the United Kingdom", the institution has assured.

Starting this Wednesday, the BoE will make temporary purchases of long-term government bonds [10 and 30 years].

The risk premium, in these offers, has shot up in recent days to 233 points.

“The purpose of these purchases is to restore appropriate market conditions.

Procurement will be made on whatever scale is necessary to achieve that result.

The operation will be fully insured by the UK Treasury," says the BoE.

The decision involves allocating more than 72,000 million euros to these purchases in the next thirteen days, at a rate of about 6,000 million per day in each auction.

Minister Kwarteng holds two meetings a week with BoE Governor Andrew Bailey.

During the Conservative Party primary campaign, Prime Minister Liz Truss and her team spoke out harshly against the monetary authority, reproaching the institution for not doing enough to contain inflation and even suggesting that they would cut back on the independence that the BoE enjoyed since the Labor era Gordon Brown.

Arriving at the Government, they folded sails, and sought cooperation with the regulatory authority.

“The minister is committed to the independence of the Bank of England.

The Government will continue to work closely with the bank to support financial stability and inflation targets," the British Treasury said in a statement following the announcement of the bond purchase.

The reaction of the markets, after the BofI announcement, has been to continue their charge against the pound, which has continued to fall against the US dollar.

Bonds, however, have managed to stabilize.

The IMF intervenes

The International Monetary Fund (IMF) has also unexpectedly intervened in the debate over the tax reduction of the new conservative Government of the United Kingdom, which has caused the collapse of the pound sterling.

The body led by Kristalina Georgieva has issued a harsh statement in which it warns London that it is "following very closely" the situation created, and asks the Prime Minister, Liz Truss, to "re-evaluate her plan", because it is "highly likely to create an increase in inequality.

"Given the high inflationary pressure in many countries, including the UK [the latest recorded figure is 9.9%], we do not currently recommend broad and indiscriminate fiscal packages."

The IMF points out, in a statement of unusual severity, the tax cut announced last Friday by the British Minister of the Economy, Kwasi Kwarteng.

It is the biggest tax cut in the last half century, and it will mean a hole in the public coffers of more than 50,000 million euros.

It implies a reduction of a wide range of taxes, including the maximum rate of 45% of personal income tax for the highest incomes —which the new Government eliminates—;

the basic rate —which drops from 20% to 19%—;

the corporate tax or the reversal of the rise in social contributions, approved by the previous Executive of Boris Johnson,

The institution's criticisms are also directed at the direct aid approved by the British Government for households and companies to deal with the energy crisis.

More than 150,000 million euros that will further inflate the public debt, because Prime Minister Truss rejects, as the Labor opposition proposes, re-imposing an extraordinary tax on the "profits from heaven" of gas and electricity companies.

Labor leader Keir Starmer has pointed to the IMF's harsh words as clear evidence that the Truss government must now reconsider, and even reverse, the approved measures.

“The IMF statement is very serious, and shows the disaster that this government has caused in the economy.

A self-inflicted disaster”, said Stmarmer this Wednesday on the LBC station.

Minister Kwarteng tried on Monday to convey calm to the markets with the announcement that he will publish a detailed budget plan on November 23, which will include the commitment to continue reducing the proportion of public debt with respect to Gross Domestic Product (GDP).

Few experts understand that, given the current emergency situation, the new government gives itself a period of almost two months.

The British media have echoed the

Sky News

exclusive , denied by Downing Street, according to which Prime Minister Truss initially refused even for Kwarteng to publish that calm statement, which she interpreted as a withdrawal.

Kwarteng has met again with banks and investment firms, who have asked him to speed up explanations, and keep the markets informed in this increasingly uneasy situation.

The ideological excess that accompanies the tax cut – in line with the neoliberal policies of the Reagan and Thatcher era – has made Conservative MPs very nervous.

The rebellion has not yet been expressed in public, nor does it have surnames, but there are already several voices, from anonymity, that express their fear at the idea that this crisis will translate into an electoral collapse.

The Labor opposition has demanded that the Government convene Parliament, which is currently on a break period.

During the two weeks in which the parties hold their annual conferences, Westminster closes its doors.

The Conservative Party holds theirs next week.

Labor have concluded their meeting this Wednesday.

The pound and mortgages

The pound sterling has been subjected to downward pressure again this Wednesday, in part due to the growing strength of the dollar in the markets, but also largely due to the doubts generated by the long-term sustainability of the excessive debt that it plans build up the British Government.

Some analysts, convinced that the Bank of England will be forced to act as soon as possible and further raise the price of money, are already pointing to a crisis in the real estate sector.

The official interest rate stands today at 2.25%.

Last Monday, the BoE was forced to issue an extraordinary statement in which it assured that it "would not hesitate to act" if the situation worsened.

It managed to relatively reassure the markets, which, however, continue to bet that rates will reach 6% next year.

Dozens of banks have this week withdrawn their fixed-rate mortgage offers to reconsider prices.

Various analyses, such as the one carried out by the mortgage intermediation entity John Charcol, foresee a 10% decrease in the price of housing for the coming year.




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Source: elparis

All business articles on 2022-09-28

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