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LONDON — Britain’s new leadership is facing a full-blown crisis after an unprecedented central bank intervention that appeared aimed at saving the U.K. from its own government’s policies.
The Bank of England stepped in Wednesday to stop “material risk” to the U.K. economy in the wake of last week’s so-called mini-budget from Chancellor Kwasi Kwarteng.
The bank will buy up U.K. government bonds to try to halt a dramatic sell-off as it warned of a “material risk to UK financial stability.”
It will begin buying long-dated government bonds at “whatever scale is necessary” in a bid to “restore orderly market conditions.”
The move comes after the cost of U.K. government borrowing spiked dramatically and surpassed rates paid by Italy and Greece in the wake of Kwarteng’s fiscal plan, leaving pension funds badly exposed.
Increasing numbers of Tory MPs are now calling for Kwarteng and new Prime Minister Liz Truss to go – just three weeks into their new roles.
Friday’s announcement of debt-funded tax cuts — unveiled without the usual scrutiny from independent fiscal watchdog the Office for Budget Responsibility — was followed by a plunge in the pound and sparked rare criticism from the International Monetary Fund.
The budget came hard on the heels of a multibillion-pound government promise to cap soaring consumer and business energy bills with state subsidies.
Some Conservatives made clear they would vote with their feet by swerving next week’s annual Conservative Party conference in Birmingham, traditionally the place for a new leader to go on a victory lap. The Times reported that Truss’ vanquished leadership rival, former Chancellor Rishi Sunak, would not attend the gathering.
One Conservative MP who stressed that they would be giving the event “a wide berth” said they had “no interest in watching Truss and her mad acolytes congratulate themselves on having quite possibly destroyed the Tory Party forever.”
Knives are already out for Kwarteng. However, given his ideological closeness to Truss — who won over Tory members with a promise of tax cuts and deregulation in a bid to spur economic growth — it is unclear whether a change at the Treasury would calm markets. The finance ministry’s experience top official, Tom Scholar, was sacked in one of Kwarteng’s first acts as chancellor.
Tory MP Simon Hoare tweeted: “These are not circumstances beyond the control of Govt/Treasury. They were authored there. This inept madness cannot go on.”
Another Conservative backbencher said the “least bad option at this point would be to fire Kwasi.” They added: “Truss’ fate is sealed. But this is her best hope of avoiding total catastrophe.”
Others appeared resigned to electoral defeat, even without a national vote on the cards until 2024.
Asked how the party would react to the market chaos, a third Tory MP said: “Nothing. It’s already happened. Tory economic competence shot to pieces. We limp on for two years and get destroyed at the ballot box.”
IMF warning
Kwarteng has promised more detail on his fiscal plan in the coming weeks, including independent costings from the OBR and a host of supply-side reforms.
But, in a scathing verdict on the U.K.’s plans issued Tuesday night, the IMF urged Kwarteng to “re-evaluate” his tax-cutting plan, which includes the scrapping of the top rate of income tax and an end to a bonus cap for bankers, saying it will “likely increase inequality.”
“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture,” the statement — a rare intervention on a G7 economy from the IMF — read.
Shortly after the IMF statement, credit ratings agency Moody’s released its own damning assessment, saying the fiscal plan could threaten the U.K.’s credibility with lenders by increasing its budget deficit. Allies of Truss in turn lashed out at the IMF, prompting former Tory Chancellor George Osborne to note: “Odd to see free marketeers urging a free market government to ignore the markets.”
The opposition Labour Party, which has been buoyed by recent polling giving it a sizeable lead over the Conservatives, seized on the Bank of England’s intervention, with leader Keir Starmer demanding a recall of parliament and urging an about-face on the mini-budget “before any more damage is done.”
Former Labour adviser Torsten Bell, who now heads up the Resolution Foundation economics think tank, said: “This is by far the worst unforced economic policy error of my lifetime”
Analysts meanwhile pored over the detail of the bank’s intervention. Capital Economics said that the BoE’s steps show “it is going to do all it can to prevent a financial crisis” but that U.K. markets are “in a perilous position.”
“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long,” the research consultancy said in a note.
“Either way, the downside risks to economic growth are growing. And the chancellor’s 2.5 percent real GDP growth target is looking even more unachievable.”
A fourth Tory MP, who backed Sunak, said: “What is there to say? I’m trying to bite my tongue to avoid saying ‘I told you so, you fucking fools’ to all my colleagues and members.”
Johanna Treeck and Jules Darmanin contributed reporting.
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