The Bank of England announced this evening (Wednesday) that it will purchase long-term government bonds without the limit.
Such an intervention is considered a dramatic step designed to calm the British bond market whose yields have jumped in recent days in response to the plans of the new government.
The sales of British bonds that led to the rise in yields began already on Friday, when the new government plan was announced, which particularly affected long-term bonds.
"If the dysfunction in this market continues or worsens, there will be a substantial risk to the financial stability of the United Kingdom. This will lead to a reduction in the flow of credit to businesses and households. The purpose of these purchases will be to restore orderly market conditions," the central bank added in its announcement, which had an immediate impact on the markets.
"The purchases will be made on whatever scale is necessary to achieve this result," the Bank of England said in a statement.
"This will lead to a reduction in the flow of credit to businesses and households."
The Bank of England, photo: Reuters
The announcement of the intervention brought some calm in the bond market, but the British pound continued to fall and fell by 1.7% against the dollar, to $1.05, back to the record low reached on Monday.
We will remind you that on Monday the British pound fell by about 5% against the background of the announcement of the tax reduction plan of the new Prime Minister Truss.
According to the plan, government spending will increase by 3.2% of GDP in the next six months.
The collapse of the pound and the rise in UK bond yields is explained by investors' fear that such an expansionary fiscal policy in an economy that is at full employment with restrictions on the supply side will lead to an acceleration in inflation and therefore also lead to a sharper interest rate increase by the Bank of England. In addition, Britain is expected to have difficulty in financing The deficit, which is expected to reach 8%-9% of GDP in 2022-2023.
The British pound continues to fall and fell by 1.7% against the dollar, photo: AFP
The intention of the British Prime Minister is to protect households from a spike in electricity and energy expenses, but her plans have been severely criticized by economists, among other things, because of the volume of loans that will be required for timely financing, and this at a time of high inflation.
The International Monetary Fund issued a surprise statement on the British economy on Tuesday, calling on the government to "reassess" its plans.
We will also note that the International Monetary Fund has warned that the moves planned by the British government will only accelerate the rate of price increases, which the central bank is trying to mitigate through interest rate increases, and that the fiscal policy cannot be contrary to the monetary policy
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