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Bank of England intervenes…again

11 October 2022

By James Surallie

In what has been a ‘series of unfortunate events’ since the mini budget, with the pound hitting a 37 year low against the dollar, pensions funds nearly collapsing, and the IMF warning that the Government’s plan will lead to increased inequality, today’s announcement by the Bank of England (BOE) could be considered the next chapter in this tale.  

Earlier today, the BOE announced it was expanding its emergency bond-buying operation in a bid to restore order to the country’s bond market. In its statement, the Bank said it will widen its purchase of UK Government bonds – knowns as gilts – to include index-linked gilts until Friday 14 October as it warned of “dysfunction” in the market. This latest measure marks the first time the Bank has used this form of intervention and comes just a day after they promised to double the amount of bonds it would buy after UK Government borrowing costs soared to the highest levels since the BOE began its emergency intervention.  

With increasing worry about the stability of the market, the Pension and Lifetime Saving Association declared that many UK pension funds feel that the BOE intervention should be extended at least until Chancellor Kwasi Kwarteng unveils his debt-cutting plans on 31 October, and possibly beyond, to “manage market volatility”.  

For the Chancellor, it now appears that his fiscal event is already make or break. In an attempt to reassure the markets, yesterday, Kwasi Kwarteng brought forward the OBR’s forecast alongside his Medium-Term Fiscal Plan by nearly month to 31 October. On top of this, the Government announced the appointment of James Bowler as the new Permanent Secretary to the Treasury instead of Antonia Romeo - who many expected to replace Sir Tom Scholar after he was sacked by Kwarteng in hope of changing “treasury orthodoxy”. 

Despite this change in approach, the Chancellor’s fiscal event must not only reassure the markets, but also his Conservative colleagues. Recently, the Institute of Fiscal Studies warned that the government would have to cut spending or raise taxes by £62 billion if they were to stabilise or reduce the national debt. With Prime Minister Liz Truss pledging to “deliver a bold plan to cut taxes and grow our economy”, it seems the Chancellor will opt for the former.  

If this it is to be case, Kwarteng faces a race against the clock to find the necessary cuts. The decision to U-turn on their plan to scrap the 45p tax rate only represents £2 billion, which means that the remaining cuts will likely come from public sector spending. With rumours that Liz Truss is still considering whether to raise benefits in line with inflation, the Government may struggle to convince MPs, and the public, that another round of austerity is necessary during a cost of living crisis.  

As MPs returns to Parliament after conference recess today, it now seems that the Governments fate is inadvertently tied to the markets. If the markets are spooked when Halloween arrives on 31 October, and Labour continue to rise in the polls, there will likely be serious questions among Conservative MPs as to whether the party can continue under the stewardship of Liz Truss.