Bank of England plays chicken
The UK’s central bank
is digging in, insisting that it will stick to Friday’s deadline to end its emergency £65bn gilt-buying scheme. The Bank of England said temporary and targeted purchases of UK government gilts would end on October 14, which led to a rush to sell. That sent long-term borrowing costs soaring.
On Wednesday, the BoE’s bond buying escalated, with $4.4bn of gilts bought from investors. It was fighting a renewed sell-off after its vow to end the programme unsettled markets.
The latest flurry of sales comes after BoE governor Andrew Bailey warned pension funds had “three days left” before support ended. Pension funds are scrambling to shore up their liquidity buffers.
But BoE officials
briefed lenders in private that it was prepared to extend the programme if volatility flared again. Bailey is playing
a game of chicken with markets, says Chris Giles.
The BoE has rushed to contain the fallout from chancellor Kwasi Kwarteng’s tax-cut package, part of his September 23 “mini” Budget, which sent sterling and the gilt market into volatile territory and triggered a liquidity crisis for pension funds.
But there is little sign the central bank will use all of its $65bn capacity; the scale of buying has remained relatively modest, even as chaos in the gilt market reignited on Monday.
Our
explainer sets out how the bond-buying programme works, and examines whether the BoE will be able to end the programme on schedule, even if it wants to do so.
Fallout for Truss
The BoE says “
lessons must be learned” from the crisis. So where does all this leave Liz Truss, the UK prime minister who took office less than six weeks ago?
The political fallout has been damaging. Truss
insists she will not cut public spending to fund the debt-funded tax cuts that blew a hole in the public finances, despite the
IMF warning to governments this week to rein in spending or risk investors’ mistrust.
But she also insists she will not scrap those tax cuts, including a £17bn plan to reverse an increase in corporation tax.
Restive Tory MPs are
pushing for a rewrite of the “mini” Budget, including the reversal of a £17bn plan to cut corporation tax.
Robert Shrimsley
argues that Truss’s government, which spent its campaign denouncing the economic establishment, is now cleving to the very institutions it blames for the UK’s decline.
Her political future now depends on them, but her reset may not be enough. Investors are treating the UK as an outlier among western economies. Among G7 nations,
only Italy’s 10-year Treasuries have a higher yield.
Truss is also
at cross-purposes with business, argues Helen Thomas. The government is serving up an outdated version of what companies want.
“Most lobby groups were not calling for a reversal of the hike to corporation tax, nor the removal of the cap on bankers’ bonuses,” she writes. “No one was asking for the axing of the top rate of tax, and few see the benefit in ever more drastic pledges to exorcise EU rules.”
The mood in the Conservative party is mutinous. “I just don’t see a way out of this,” says one ex-minister.
Biden on collision course with Saudis
The US president has vowed to
rethink relations with Saudi Arabia, after the Opec+ cartel of oil-producing countries cut oil production last week.
In an interview with CNN, Joe Biden warned Riyadh would face “consequences” for defying Washington.
Opec+ is cutting production by 2mn barrels a day, infuriating the Biden administration as it prepares for mid-term elections in November against a backdrop of soaring energy prices triggered by Russia’s invasion of Ukraine. The Fed’s monetary policy
is likely to tighten further in a bid to bring prices under control.
Russia is escalating its offensive: President Vladimir Putin
ordered missile strikes across Ukraine cities this week in retaliation for the attack on the Kerch bridge linking Russia to the annexed Ukrainian peninsula of Crimea.
Meanwhile, western governments are scrambling to secure supplies and keep costs down. The EU wants to
force member states to nominate energy companies to join a region-wide platform for joint gas purchases in an effort to lower prices.
In the UK,
investors are demanding clarity on the UK government’s energy windfall tax on low carbon electricity generators. The government said this week it plans to
impose a limit on revenues to raise “billions of pounds” to offset its £150bn energy support package for consumers and businesses. But it failed to fix a level for the cap, which comes into force in less than three months.
Energy prices are contributing to the cost of living crisis. Hundreds of people across the world responded to an FT callout to reveal what sacrifices they are making to cope with the squeeze on incomes.
From delaying marriages and starting families to selling unwanted items on eBay,
find out how FT readers are coping.
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