Bank of England steps in after pound falls and FTSE tumbles

IMF warned the UK overnight that its tax-cut plan will increase inequality

A currency board in London. The FTSE 100 fell sharply at the opening on Wednesday. EPA
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The Bank of England stepped in to stabilise the British economy on Wednesday after the pound dipped and the FTSE tumbled following an intervention by the International Monetary Fund, which urged the UK to rethink its tax-cutting plans.

The central bank said it will start a temporary programme of bond purchases to stabilise the market, while postponing the planned start of its gilt sale programme.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” it said.

A long-serving Conservative MP told The National that there were now calls for Kwasi Kwarteng to be sacked as Chancellor following Friday's destabilising mini-budget.

The so-called “fiscal event” represented the biggest tax cuts in 50 years, including the abolishment of the top rate of tax for the country’s biggest earners.

On Tuesday the IMF said it was “closely monitoring” developments and urged Mr Kwarteng to “re-evaluate” his tax measures, saying, in an extraordinary statement on Tuesday, that it would increase inequality.

Its intervention came as the Bank of England signalled it was ready to increase interest rates to shore up the pound and guard against increased inflation.

Sterling fell by 0.95 per cent overnight against the dollar to $1.06, reversing a marginal 0.4 per cent gain it made on Tuesday. It briefly rose following the bank's announcement on Wednesday, before falling back again to $1.0568.

Ratings agency Moody's said Britain's new fiscal policy regime was “credit negative”. It warned a sustained confidence shock could permanently weaken the UK's debt affordability.

The Tory MP said there was “sheer disbelief” in the party over what has happened in the last few days.

“We may well see one of the shortest chancellor careers in history with Kwasi [Kwarteng] getting the sack. What might happen after that is totally unclear. Bring back Rishi?”

Neither Mr Kwarteng nor Ms Truss have shown any willingness to roll back the tax cuts, which made good on some of the promises she delivered on her leadership campaign trail over the summer.

But the chancellor has stepped up efforts to reassure the City about his economic plans.

Mr Kwarteng met executives from Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg, among others on Wednesday, underlining the government’s "clear commitment to fiscal discipline”.

"The chancellor underlined the government’s clear commitment to fiscal discipline and reiterated that he is working closely with the Governor of the Bank of England and the OBR (Office for Budget Responsibility) ahead of delivering his Medium Term Fiscal Plan on 23 November," a Treasury readout of the meeting said.

Political sources have indicated that former chancellor Mr Sunak, who came second in the race to succeed Boris Johnson, will not attend the Conservative Party conference beginning on Sunday, instead staying at his constituency in Yorkshire.

But his political position has been significantly strengthened by his strong arguments during the leadership campaign against tax cuts before first stabilising spending and inflation.

There is also speculation that parliament will be recalled to deal with the growing emergency but this is likely to be resisted by the Conservatives just as they begin their important conference that could see further division and drama.

With pension funds vulnerable to the growing economic disaster, older Tories will be asking hard questions at the Birmingham conference.

The FTSE 100, an index of Britain’s 100 biggest companies by market capitalisation, dropped sharply at the opening on Wednesday, dropping by 0.8 per cent to 6,927 points.

It has fallen more than 220 points since Thursday, the eve of the mini-budget announcement.

Adnan Mazarei, a former deputy director for the IMF, said the fund usually reserved such criticism for emerging markets, not established economies.

He said they were “common with regard to emerging market countries with problematic policies, but not often about G7 countries,” which are the seven richest nations in the world.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, agreed. She said the IMF’s move had added to worries that the UK is fast taking on the characteristics of an emerging market economy, putting its developed-country status at risk.

“It’s now not only racked with trade disruptions, an energy crisis and soaring inflation, but it’s also being closely monitored by the international body known as the world’s lender of last resort,” she said.

Craig Erlam, senior market analyst at the foreign exchange company Oanda, said everyone appeared to be “unusually united” in their objection to the treasury’s plans.

“Moody’s was equally scathing, warning that the measures are a credit negative that could threaten the country’s credibility with investors and more permanently weaken the UK’s debt affordability,” he said.

“It’s no surprise then to see sterling plummet once more alongside Kwasi Kwarteng and [Prime Minister] Liz Truss’s credibility on the world stage. Not the best start to life in Downing Street.”

White House economic adviser Brian Deese said he was not surprised by the markets’ negative reaction to the mini-budget. He said it was important to focus on “fiscal prudence, fiscal discipline”.

He said introducing tax cuts at a time of monetary tightening, when interest rates were being raised, meant monetary policy might have to be tightened even further.

The leader of the UK's opposition Labour Party, Sir Keir Starmer, said the criticism of the government's planned tax cuts was “very serious”.

“Quite often when the markets are jittery, when the pound falls, it's because of some international event — conflict in Ukraine, a cost-of-living crisis, energy crisis. [But] this is self-inflicted by the government,” he told LBC radio.

British Prime Minister Liz Truss and Chancellor Kwasi Kwarteng visit a factory in Kent last week. Reuters

But Ms Truss's supporters dismissed the concerns about the Treasury's plans.

Sir John Redwood, a Tory MP, said: "[The IMF] didn't warn us or the other central banks in the run-up to the big inflation, that the monetary policies of 2021 were far too loose, interest rates far too low, and the money printing was getting out of control.”

He said the government should be prudent, but “the truth is if the austerity policies have their way and we have a big recession, the borrowing won't go down, the borrowings will soar”.

“My message today is that the government are right to see the main threat for the year ahead is recession not inflation, because the good news is that all forecasters say inflation will come down a lot next year, and the sooner the better.”

Meanwhile, food inflation has hit a record, with British shoppers paying 10.6 per cent more at the supermarket than they were a year ago, data from the BRC-NielsenIQ price index showed.

Retail prices also rose by 5.7 per cent in the first week of September, the highest rate since 2005, the index showed. The figure was up from 5.1 per cent for the whole of August.

Retailers slid by 3.3 per cent on Wednesday, with online fashion retailer Boohoo slumping by 9.2 per cent to its lowest level in seven years after it cut its full-year outlook. It blamed this on a worsening macroeconomic and consumer backdrop.

“Even before the recent drop in sterling will start to make imports more expensive for customers, they are already starting to tighten their belts and that is going to take a toll on retailers going forward,” Ms Streeter said.

Julian Jessop, the former chief economist at the Institute for Economic Affairs, said there was a worry the UK would end up “in a doom loop of a falling currency, rising interest rates and weaker growth”.

The UK’s annual rate of consumer price inflation eased to 9.9 per cent in August, down from a 40-year high of 10.1 per cent in July, the Office for National Statistics said.

“Downwards pressure from the cost of motor fuel” was the main reason for the fall in the annual rate of inflation, it said, suggesting the reprieve may not last in the face of rising prices elsewhere in the economy.

The Bank of England has said it will not hesitate to change interest rates “by as much as needed” to get inflation back to its 2 per cent target.

Experts said money markets are now pricing in a 1.5 per cent rise in interest rates before the next scheduled meeting of the bank in November. Rates are now predicted to rise above 6 per cent next year.

The turmoil led to a record overnight drop in the choice of mortgage products. Financial information site said 935 fewer residential mortgage products were on the market on Wednesday compared to the day before.

It was the highest fall on Moneyfacts’ records going back to November 2011.

Updated: September 28, 2022, 2:09 PM