British debt: the Bank of England intervenes urgently to avoid a financial crisis

British debt: the Bank of England intervenes urgently to avoid a financial crisis

04:04 PM, September 28, 2022

“The market movement has been exacerbated since [mardi] and especially affects long-term debt”, lamented the Bank of England in a press release released by AFP on Wednesday. Before alerting: “If this market failure continues or worsens, it would pose a real risk to the UK’s financial stability. » UK financial markets are rocked by the Liz Truss government’s onerous budget plan. A situation that could cause a major financial crisis, and to which the Bank of England had to react.

she rushed to “restore normal market conditions”announced in its press release. So the Bank of England is going to “make purchases of government bonds with long maturities”. These will be “funded entirely by the Treasury [public] »it specifies.

Liz Truss’s expensive budget plan

Liz Truss’s government announced last Friday new measures to support the purchasing power of the British and a tax cut. But this budget plan promises to be very expensive. Economists put the spending at between £100 billion and £200 billion. The funding and impact of this plan remain unclear and have not been quantified by the government. Which causes problems in the financial markets.

Also read – Strategy, challenges… What could the mandate of Liz Truss, elected Prime Minister of the United Kingdom, look like?

The pound fell to a record low on Monday and has recovered little since then. In addition, the yield on state debt, which rises when demand falls, soared, reports AFP. Thirty-year bond yields also rose, signaling a rise in the cost of financing UK debt. While hovering around 3.5% at the beginning of last week, it rose to 5.14% on Wednesday. Following the Bank of England announcements, the rate fell sharply, however, remaining higher than last week at 4.47%.

But the Bank of England has not yet managed to calm the fall in the pound, which fell 1.41% to $1.0581 early Wednesday afternoon. Sky-high loan rates risk making UK home mortgages and corporate loans more expensive to the point where they could no longer pay.

The IMF gives a conference in Downing Street

The Liz Truss government’s budget plan, consisting of aid to pay energy bills and tax cuts, has been harshly criticized by the International Monetary Fund (IMF), which called Downing Street and the Chancellor of the Exchequer Finance), Kwasi Kwarteng, to change this situation. And this, while the United Kingdom is experiencing an inflation rate of almost 10% in a year.

Also read: Liz Truss rules out taxing energy companies to deal with the UK crisis

“Given the high inflationary pressures in a number of countries, including the UK, we do not recommend any significant unfunded fiscal action, as it is important that fiscal policy does not get in the way of monetary policy.”, estimated the IMF as reported by AFP. The IMF thus invited the government to “reevaluate their fiscal measures, particularly those aimed at the highest incomes” who risks “increase inequalities”.

On the morning of this Wednesday, the Treasury defended its budget plan again: “We have acted quickly to protect homes and businesses this winter and next winter. »

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