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To stabilize the falling pound, the Bank of England swung into action on Wednesday announcing the purchase of its long-dated government bonds.
On Wednesday, September 28, the British central bank took emergency measures announcing the purchase of long-dated government bonds to stabilize the falling market. Furthermore, it decided to postpone the start of its gilt sale program next week.
Bank of England Provides Market Forecasts
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy. The purchases will be carried out on whatever scale is necessary to effect this outcome.”
Following the Bank of England’s action, the 30-year yield dropped by 20 basis points on Wednesday. The British central bank also stated that it remains focused on reducing its 838 billion pounds ($892 billion) of gilt holdings by 80 billion pounds over the next year. However, owing to the market conditions it would postpone the start of the gilt sales.
As the market conditions stabilize once again, BoE plans to sell back the gilts. “These purchases will be strictly time-limited. They are intended to tackle a specific problem in the long-dated government bond market,” it further added.
Sterling Pound Collapses
The British Sterling pound has been on a steep fall against the U.S. Dollar hitting new all-time lows. In the early trade on Thursday, September 29, The pan-European Stoxx 600 fell 1.7% with GBP falling another 1% to trade around $1.078.
Prime Minister Liz Truss along with her chancellor Kwasi Kwarteng unveiled a mini-budget on coming to power earlier this month. Her government’s plans to cut taxes, especially for the U.K’s highest earners, have sent shock waves across the financial markets causing the GBP to plummet. Analysts have been arguing that this would fuel already soaring inflation and increase economic inequality.
The International Monetary Fund (IMF) rebuked the British government urging them to re-evaluate their plan. Rebecca McDonald, the chief economist at the Joseph Rowntree Foundation, said:
“There are many millions of people across the UK who will find this winter incredibly difficult financially. These people had to watch the chancellor cut taxes for those who are better off — it was incredibly difficult to hear.”
Over the current actions of the Liz Truss government, Brits have expressed major concerns with decreasing confidence in the Prime Minister.