LONDON – The Bank of England announced a highly unusual market intervention on Wednesday, hoping to stem a dump pound and a rush into UK bonds that began after new Prime Minister Liz Truss unveiled her central economic plan.
“If this market dysfunction continues or worsens, there will be a material risk to UK financial stability,” the Bank of England said in a statement.
The bank said purchases “will be made to any extent necessary to effect this outcome” to “restore orderly market conditions.” It is also said to be limited to two weeks.
The British pound hit an all-time low against the dollar after the tax cut
Truss, who has been in the job for just three weeks, is trying to shake up the British economy with bold — some would say dangerous — moves that have spooked investors. Truss has made no secret of her free-market views. During the leadership campaign to replace Boris Johnson as Prime Minister, she said she would be a tax cutter from the get-go.
On Friday, she made good on that promise and the government announced massive tax cuts and a big jump in borrowing. The plans include scrapping the top income tax rate of 45 per cent for people earning more than £150,000 and scrapping the cap on banker bonuses.
Markets gave their early verdict: On Monday, the pound sterling fell to an all-time low against the US dollar, falling as low as 1.03 at one point before recovering somewhat. Some economists say the pound could fall to parity with the dollar.
On Wednesday morning, the pound fell back to 1.06 after reaching 1.08 on Tuesday.
“It’s a self-inflicted wound like any other ups and downs in the market,” opposition Labor leader Keir Starr told the BBC on Wednesday morning. According to a recent YouGov poll, his party is up 17 percentage points. It is the party’s biggest lead against the Conservatives since 2001, when Labor leader Tony Blair won a landslide victory.
Truss will have to call a general election by January 2025 and is keen to speed up her ideas on the economy.
On Tuesday, the International Monetary Fund issued a rare rebuke of the new British government’s handling of monetary policy.
In an unusually blunt statement, it said it was “closely monitoring” the situation in the UK, and that the government’s plans were “likely to increase inequality.” Targeted fiscal packages are not recommended during periods of high inflation, it said.
Truss and her chancellor Kwasi Kwarteng have defended their vision for the economy.
“They are willing to risk unpopularity because they think it will work in the long term,” said Tony Travers, a professor of politics at the London School of Economics.
He noted that, unlike some of her Conservative Party predecessors, including Johnson and Theresa May, Truss’ free market views were fairly straightforward. Her government “wants Britain to have a lower tax, more flexible economy that competes with high-paid workers and talent in the EU and globally.”
“Whether it works or not, only time will tell,” he said, “Whether it lasts in the short term, time will soon tell.”