The Bank of England has launched an emergency UK government bond-buying programme to prevent borrowing costs from spiraling out of control and stave off a “material risk to UK financial stability”.
The Bank announced it was stepping in to buy government bonds – known as gilts – at an “urgent pace” after fears over the government’s economic policies sent the pound tumbling and sparked a sell-off in the gilts market.
On Wednesday, Labour called for Chancellor Kwasi Kwarteng to issue an “urgent statement” on how he plans to fix the “the crisis that he has made”.
The party, alongside the Liberal Democrats and the Scottish National Party (SNP), also insisted that parliament, which is currently on a conference recess, should be recalled.
While the pound hit an all-time record low of 1.03 against the US dollar on Monday, the yield on ten-year gilts – which is a proxy for the effective interest rate on public borrowing – has soared by the most in a five-year period since 1976, according to experts.
ITV News Political Reporter Shehab Khan explained: “The Bank of England has stepped in to buy government bonds, at a high rate, to essentially fund the government’s tax cut policy… the Bank of England would only step in this significantly if the economy was in real trouble.”
In its statement, the Bank of England said there would be a substantial risk to UK financial stability “were dysfunction in this market to continue or worsen”.
“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” it said.
“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”
Analysis by ITV News Political Editor Robert Peston
Kwasi Kwarteng was of course only implementing the tax cuts promised by Truss, plus a chunk on top.
So, she is irrevocably implicated in the financial and economic mess. Tory MPs, including ministers, say her ability to survive this mess depends on her moving swiftly to appoint a new chancellor, one with credibility in markets.
They can think of three: Michael Gove, Sajid Javid and – whisper it softly – Rishi Sunak. This would be the climbdown of all climbdowns by a PM, especially after so few days in office.
And maybe Kwarteng and Truss will be given the time and space to tough this out. But that their colleagues should be talking about replacing one or both of them so soon is extraordinary (in the true mean of the word).
In response to the Bank, the Treasury reaffirmed its commitment to the BoE’s independence and said the government “will continue to work closely with the Bank in support of its financial stability and inflation objectives”.
It comes as the chancellor has been stepping up efforts to reassure the City about his economic plans after the International Monetary Fund criticised the government’s strategy – and as the pound suffered further falls on Wednesday.
According to the treasury, Mr Kwarteng “underlined the government’s clear commitment to fiscal discipline” in a meeting with Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg.
Meanwhile, Labour leader Sir Keir Starmer urged the government to abandon the mini-budget measures.
Speaking to reporters at the Labour Party annual conference in Liverpool, he said: “The move by the Bank of England is very serious.“And I think many people will now be extremely worried about their mortgage, about prices going up, and now about their pensions.“The government has clearly lost control of the economy.”
In a stinging condemnation of his own colleagues, Conservative MP Simon Hoare tweeted: “These are not circumstances beyond the control of Govt/Treasury. They were authored there. This inept madness cannot go on.”
Scotland’s First Minister Nicola Sturgeon said the Commons should be immediately recalled from its break for the party conferences with the UK being in the grip of a “rapidly deteriorating economic crisis”.
And Liberal Democrat leader Sir Ed Davey said: “Liz Truss has 24 hours to fix this economic disaster and prevent people losing their homes.
“Now is the time for the prime minister to recall parliament to reassure not just the financial markets, but also British homeowners at risk of higher mortgage costs.”
MPs are not due to return to Westminster until October 11 following the break for the party conferences.
On Wednesday, Angela Rayner also hit out at Mr Kwarteng, during her speech at the Labour Party conference in Liverpool.
The deputy leader said: “When interest rates were low and borrowing was cheap, they [Conservatives] sacrificed public services for austerity. Now they’re borrowing just as interest rates are soaring.
“To think this was the party that claimed they were for sound money. That’s what one high-flying new Tory MP certainly thought in 2012.
“He wrote a pamphlet demanding a balanced budget every year. He said ‘fiscal prudence is the very least we should expect from a chancellor’. And if they failed, they should face a 20% pay cut.
“That Tory MP must be absolutely furious with the new Tory Chancellor, except he is the new Tory Chancellor.”