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UK’s Chancellor faces heat as central bank steps in to buy bonds and deflect market risk

Image Flickr Policy Exchange

It has been three weeks since Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng have assumed office and there are rumblings among Tory MPs who are asking them to quit. A “mini-budget”, announced on Friday envisaged huge tax cuts and a promise of state subsidies for soaring energy bills. This led to a dramatic drop in the pound and a large scale selling of government bonds. The Bank of England (BoE) has stepped in to stop the selloff and is buying up UK government bonds.

The mini-budget proposed by the Conservative government in the U.K. drew criticism from the markets. Listeners on BBC Nottingham called out the Prime Minister for the budget which they called as a reverse “Robin Hood Budget.”

Robin Hood is a much revered figure in British history. He was not only an excellent archer but was also famous for stealing from the rich and giving the wealth to the poor. He was an outlaw who lived in the forests of Nottinghamshire and stood up against the Sheriff of Nottingham.

Modern day listeners in Robin Hood’s county of Nottingham said that PM Liz Truss had formulated a reverse “Robin Hood Budget” as the broad tax cuts would favor the rich and burden the poor. However, Liz Truss defended the budget proposed by her and chancellor Kwasi Kwarteng on the BBC program.
The mini-budget was also criticized by the International Monetary Fund (IMF).

Investors left the fixed income markets in the U.K. after the sweeping tax cuts were announced. So, the central bank had to intervene by temporarily purchasing long-dated U.K. government bonds to calm the markets and increase the financial stability of the country.

As the BoE supported the buyback of the government bonds, the 30 year yield fell down by 100 bps. The bank has pledged to buy 65 billion pounds which is roughly equal to $69 million. The long-dated gilts fell dramatically after the tax cut plans announced by the government led to the biggest sell off of the bonds.

On Wednesday, the Bank of England also announced that it would be postponing its program to sell its government bond holdings that amount to 838 billion pounds which is roughly equivalent to $891 billion. These bonds had been acquired during the 2007-2008 financial crisis that had rocked global markets and during the COVID-19 pandemic.

The sale of these holdings was to begin next week but has been delayed. However, the Bank of England said that it remained committed to a 80 billion pound cut that would take place in the next twelve months.

The central bank has not put a limit on the amount of buy back in its current intervention. It has said that it planned to hold daily auctions and would buy up to 5 billion pounds of gilt that had a maturity of 20 years or more. These purchases would take place between Wednesday and October 14.

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