Bank of England Warns Of "Risk To UK Financial Stability" In Drastic Intervention
The Bank of England has taken the drastic step of buying government debt to stabilise the market after the Liz Truss and Kwasi Kwarteng's “mini budget” triggered a sharp fall in the pound.
In a statement on Tuesday, the bank said it had been forced to act to “restore orderly market conditions” and warned that there was a “material risk to UK financial stability".
The markets have been in turmoil since Friday when Chancellor Kwarteng announced that the government would borrow tens of billions of pounds to pay for sweeping tax cuts.
Kwarteng and Prime Minister Truss argue that the policies, which include scrapping the 45 per cent tax band and removing the cap on bankers’ bonuses, are needed to kickstart growth.
However, his House of Commons statement last week was followed by the pound falling to a 37-year low and its lowest ever level against the dollar, triggering fears of soaring interest rates and further inflation.
Labour leader Keir Starmer, alongside the Scottish National Party (SNP) and Liberal Democrats, have today called on parliament, which is currently in recess for party conference season, to be recalled after the bank's announcement.
Rachel Reeves, the shadow chancellor, urged Kwarteng to make an "urgent statement".
She said: "People will be deeply worried about the cost of their mortgage, about their pensions, and about the impact this will have on their cost of living.
“This is a serious situation made in Downing Street and is the direct result of the Conservative Government's reckless actions, which include tax cuts for the richest 1%."
There is growing fury among Conservative MPs ahead of the party's conference in Birmingham, which gets underway this weekend.
Northern Ireland Affairs Committee Chair Simon Hoare MP, who backed Rishi Sunak in the contest to succeed Boris Johnson as Tory leader and prime minister, described the government's actions as "inept madness" and likened the Bank of England announcement to Black Wednesday.
Robert Largan MP tweeted that the government decision to scrap the 45 per cent tax rate was a "mistake".
A former minister dismissed talk of Truss facing a leadership challenge just weeks after becoming prime minister, saying it was only a few "hot heads" on the Conservative benches who were considering it.
However, they warned that the actions taken by the new prime minister risked not just the losing the next general election, but “putting the Tories out of power for quite a long time”.
A source on the Tory backbenches told PoliticsHome: "You can’t govern on the back of a couple of think-tank pamphlets. Governing is a serious, grown-up business - it is somewhat depressing to see all the predictions Rishi’s campaign made come true in alarming fashion.
"Liz’s prospectus was either going to get lucky and work brilliantly, or be a complete disaster that would lose us the election."
A Treasury spokesperson said: “The Bank of England, in line with its financial stability objective, carefully monitors financial markets and any potential risk to the flow of credit to the real economy, and subsequent effects on UK households and businesses.
"Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today (28 September) in order to restore orderly market conditions. These purchases will be strictly time limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.
“The Chancellor is committed to the Bank of England’s independence. The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives.”
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