Bank of England expands efforts to stabilize financial markets

By DANICA KIRKA, Associated Press

LONDON (AP) — The Bank of England on Tuesday expanded its emergency effort to quell turmoil in financial markets sparked by the government’s plan to cut taxes, saying swings in bond prices were a “risk important” to Britain’s fiscal stability.

Britain’s central bank said it would now buy inflation-linked securities – which offer inflation protection – as well as conventional government bonds in a bid to “restore orderly conditions” to the market. The purchases will total up to 10 billion pounds ($11 billion) per day, split equally between the two types of bonds, and the program will end on Friday as originally planned, the bank said in a statement.

Analysts say pension funds pressured the central bank to extend the program for two weeks, but Bank of England Governor Andrew Bailey stuck to the schedule during an appearance at the annual meeting of the Institute of International Finance in Washington. He said portfolio managers had three days to rebalance their positions.

The bank expanded the program after government bond yields jumped again on Monday, returning to levels reached immediately after the government last month announced plans for sweeping tax cuts without saying how it would cut them. would pay. It raised concerns about an increase in government borrowing that spooked markets, sending the pound plunging to a record low against the dollar and putting pension funds at risk.

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The bond-buying program responds to concerns in the so-called secondary market, where investors trade bonds previously purchased from the government. Bond prices tend to fall as concerns about a borrower’s ability to repay debts increase. This pushes the yield – or the return investors make on their money – higher because they receive the same interest rate on a smaller investment.

Investors fear the government’s plans will lead to high debt levels and fuel further inflation, which is already at a nearly 40-year high of 9.9%. The Institute for Fiscal Studies, an independent think tank, said Tuesday that stabilizing public debt levels will require “tough decisions” on a combination of spending cuts and tax increases.

Pension funds have been particularly hard hit by the turmoil over government spending priorities, with some forced to sell bonds to cover their payment obligations.

While investment funds have made “substantial progress” in reducing their risk, there were further big moves in government bond prices earlier this week, particularly for index-linked bonds, a indicated the bank.

“The dysfunction of this market and the prospect of a self-reinforcing ‘fire-selling’ dynamic pose a significant risk to the financial stability of the UK,” the bank said in a statement.

The market turmoil began on September 23, when Treasury Chief Kwasi Kwarteng presented the government’s economic growth plan in the House of Commons.

The plan includes £45billion in tax cuts and at least £60billion in increased spending to help protect homes and businesses from steep rises in energy prices this winter. The government has yet to say how it will fund the program, except to say that faster economic growth will boost tax revenue.

In an effort to assuage concerns, Kwarteng said on Monday he would release the government’s detailed plans on Oct. 31, three weeks ahead of schedule.

Critics say the government’s target for average economic growth of 2.5% a year is significantly higher than most economists predict and will be difficult to achieve.

The government may need to cut spending by up to £62billion a year to meet its public debt control targets, the IFS said in an analysis released on Tuesday.

“Recent events have illustrated the importance of a credible strategy and plan for fiscal sustainability,” the IFS said. “Just as financial markets – which ultimately have to lend the money to fill the gap in the government’s fiscal plans – might not be convinced by plans backed by the assumption of a miraculous acceleration in the growth, they may also be unconvinced by plans backed by vague promises to cut public spending in the distant future.

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