Britain's economy faced new shocks after the Bank of England ruled out extending an emergency debt-buying plan – and the government appeared to blame the independent central bank for the U.K.'s economic turmoil.
Key points:
- Bank of England says it will not extend an emergency debt-buying plan introduced last month
- The bank's governor, Andrew Bailey, says the program will end on Friday, as scheduled
- After his announcement, the pound fell by almost 1 per cent, to just below $US1.10
The pound sank against the US dollar and the cost of government borrowing rose early on Wednesday after Bank of England (BoE) Governor Andrew Bailey confirmed that a program to buy government bonds, introduced last month to stabilise financial markets, will end Friday as scheduled.
"My message to the [pension] funds involved — you've got three days left now. You have got to get this done," Mr Bailey said late on Tuesday in Washington.
"Part of the essence of a financial stability intervention is that it is clearly temporary."
Analysts say pension funds had lobbied the central bank to extend the program by two weeks.
The pound fell by almost 1 per cent, to just below $US1.10, after Mr Bailey spoke, before rallying slightly after the Financial Times reported that the bank was, after all, prepared to keep buying bonds beyond the Friday deadline.
However, the bank quashed that report, saying its "temporary and targeted purchases" of government bonds "will end on October 14".
"The governor confirmed this position yesterday and it has been made absolutely clear in contact with the banks at senior levels," the bank said.
Tax cuts spook markets
The central bank took emergency action after the British government on September 23 announced plans for 45 billion pounds (more than $79 billion) in tax cuts without saying how it would pay for them.
That announcement spooked financial markets and sent the pound plunging to a record low of $US1.03 against the dollar.
The BoE intervened to prop up the bond market and stop a wider economic crisis that particularly threatened pension funds.
On Tuesday, the bank extended its intervention, saying it will now buy inflation-linked securities — which offer protection from inflation — as well as conventional government bonds as it seeks to "restore orderly conditions" in the market.
Analysts say pension funds lobbied the central bank to extend the program by two weeks, but Mr Bailey stuck to the timeline in an appearance at the annual meeting of the Institute of International Finance in Washington.
Pain for homebuyers
The market turmoil has caused pain for many Britons, especially prospective homebuyers, who have seen mortgage rates soar on the increased prospect of a big rate hike from the central bank when it meets next month.
It has also put intense political pressure on the Conservative government of Prime Minister Liz Truss, who took office in early September with a promise to boost growth through tax cuts and deregulation.
Friction has grown between the government and the independent BoE.
Business Secretary Jacob Rees-Mogg suggested on Wednesday that market turbulence was primarily the result of the bank's failure to raise interest rates as quickly as its US counterpart, the Federal Reserve.
He said the market response was "much more to do with interest rates than it is to do with a minor part of fiscal policy".
Many economists dispute that view and blame the government's budget announcement for the mayhem.
The announcement of 45 billion pounds of tax cuts came on top of a 60-billion-pound plan to cap energy prices to help shield homes and businesses from steep price rises driven by Russia's invasion of Ukraine.
Fear plans will fuel inflation
In an effort to ease concerns, Treasury chief Kwasi Kwarteng said on Monday that he would release the government's detailed fiscal plans on October 31, three weeks earlier than scheduled.
However, the British government still hasn't detailed how it will pay for its tax cuts, except to say faster economic growth will increase tax revenue.
Investors are concerned that the government's plans will increase public debt and fuel further inflation, which is already running at a near 40-year high of 9.9 per cent.
Economists say deep public spending cuts will be needed.
The independent Institute for Fiscal Studies says the government may have to reduce spending by as much as 62 billion pounds a year to achieve its targets for controlling public debt.
In more bad financial news, the Office for National Statistics said on Wednesday that Britain's economy had contracted by 0.3 per cent in August, down from 0.1 per cent growth in July, with manufacturing and consumer services both recording falls.
"The economy shrank in August, with both production and services falling back and, with a small downward revision to July's growth, the economy contracted in the last three months as a whole," said the office's chief economist, Grant Fitzner.
AP