The financial crisis brought on by the mini-budget, which prompted the Bank of England (BOE) to seek a £65 billion emergency bailout, was centred on Britain’s pension funds on Wednesday. Bank of England claimed it had no choice but to step in to defend the UK financial system due to the sharp increase in government borrowing prices since the chancellor’s remarks.
In few days after Kwarteng’s unfunded tax giveaways, the sources claimed the unexpected action was required to stop a vicious circle in the bond markets from depleting pension funds of cash and putting them at risk of insolvency.
The BOE was anxious that it threatened the viability of Britain’s most extensive insurance and pension providers, which manage trillions of pounds in client funds.
The BOE stated it was setting aside £65 billion to buy bonds over the next 13 working days to relieve pressure on pension funds and insurance firms, reversing a policy position it had previously announced the day before Kwarteng’s fiscal year event. The BOE will buy a 10-year government bond known as gilt at an “urgent pace.”
The bond market seemed to calm down after the emergency announcement. The 10-year UK government bond’s interest rate decreased from 4.5% to 4.1%, and the 30-year rate decreased from 5% to 4.20%.
The pound, which had remained stable, plummeted significantly in response to the Bank of England’s emergency action on bonds. It dropped 1.6% to trade at $1.05. This is not far from the record lows reached the start of the week.
After the Bank of England’s emergency intervention generated similarities to Black Wednesday in September 1992, when speculators led by George Soros deposed John Major’s Tory administration, Liz Truss was facing calls from uneasy Conservative MPs to fire Kwarteng or face a mutiny.
Truss is accused of hiding away while her tax giveaway mini-budget caused economic turmoil. The International Monetary Fund took the extraordinary step of pushing the chancellor to “re-evaluate” his plans and saying they would fuel inequality.
Calls for Truss to “Come out of Hiding” as Bank Fights Turmoil Caused by Budget. 2022. The Independent: https://www.independent.co.uk/news/uk/politics/truss-kwarteng-budget-bank-imf-b2177462.html
Parker, George. 2022. ‘Bank of England Launches £65bn Move to Calm Markets’, Financial Times: https://www.ft.com/content/756e81d1-b2a6-4580-9054-206386353c4e
Wallace, By Tim. 2022. ‘Pension Funds Crisis Forces £65bn Bailout by Bank’, The Telegraph (The Telegraph): https://www.telegraph.co.uk/business/2022/09/28/pension-funds-crisis-forces-65bn-bailout-bank/
Elliott, Larry, Pippa Crerar, and Richard Partington. 2022. ‘Bank of England in £65bn Scramble to Avert Financial Crisis’, The Guardian (The Guardian): https://www.theguardian.com/business/2022/sep/28/bank-of-england-in-65bn-scramble-to-avert-financial-crisis