Following announced plans with policy-makers from the Bank of England, global investors sent the pound through a plunge. Announcements regarding a cut in taxes and expansion in borrowing have set a resounding fear in the related markets. To allay that fear, The Bank of England took action on Wednesday to stop the decline in British government bonds deemed a “serious risk to U.K. financial stability.”
As part of the emergency intervention from Wednesday, the central bank will purchase government bonds starting on September 27th and continuing through October 14th in an effort to calm the market and bring down the skyrocketing cost of borrowing for the government.
The dominoes for this reaction started on September 23rd. The government of Prime Minister Liz Truss introduced a 45 billion pound package of tax cuts on Friday in an effort to boost economic development. The worries stem from actions that may increase government debt and contribute to inflation, which is now sitting at 9.9%, close to a 40-year peak, because it was not accompanied by budget reductions or even an independent cost evaluation.
Ray Dalio, founder of one of the most successful hedge funds ever, stated that the plan “suggests incompetence.” Dalio is not alone in these remarks. The I.M.F., analysts from Wall Street, and a growing flock of other monetary stakeholders have stated similar concerns about the actions that the administration is taking.
Mortgage lenders in the U.K. withdrew hundreds of offers from the market as a result of the unrest due to predictions that the Bank of England would substantially increase interest rates to counteract the inflationary implications of the pound’s recent decline. Speculation from retail investors isn’t helping the problem either.
Big news: hearing from several sources in the UK that some pension funds are quickly becoming insolvent due to huge margin calls they can’t meet.
The massive move in 30y UK swaps and bonds coupled with risk assets tanking behind the problem.
That “explains” the BoE action.
— Alf (@MacroAlf) September 28, 2022
The U.K. government has stymied calls to change course, but it has announced that on November 23rd it would present a more thorough budget plan and an independent study from the Office for Budget Responsibility.
