The UK government and the Bank of England both announced new action on Monday in an attempt to reassure investors distraught over a colossal, uncosted budget bill last month, but markets remained feverish.
The Chancellor of the Exchequer, Kwasi Kwarteng, has advanced, in the face of repeated calls from economists and parliamentarians, the publication of budget forecasts to October 31, instead of the November 23 date initially planned. At the same time, it will publish medium-term measures to ensure that British public finances remain on a sustainable path.
The Bank of England announced new measures to ensure liquidity in the UK’s long-term Treasury bill market, which has been battered since the fiasco of a Kwasi Kwarteng budget presentation at the end of September.
Investors did not seem reassured, however, given the government’s 30-year borrowing rates, which continued to climb throughout the session on Monday, reaching 4.68%, which testifies of a distrust of the British debt.
Unresolved issues
Despite the double of the Chancellor and the Bank of England on Monday, “the fundamental problems are not resolved”, notes Ken Wattret, director for the European economy at S & P Global Market Intelligence.
The progress in the forecasts is “welcome, but there is likely to be a big budgetary hole” left unfunded, he adds, and the Bank of England’s interventions in this context amount to “putting on a bandage without cure the wound”.
On September 23, Kwasi Kwarteng unveiled vast subsidies for energy bills to deal with the cost of living crisis, but also significant tax cuts targeting above all the wealthiest households.
The whole was not quantified, but the economists evaluated this budgetary package at a colossal amount of 100 to 200 billion pounds.
Without planned savings measures, it had to be financed entirely by borrowing on the markets at a time when interest rates were rising sharply, with very high inflation of almost 10% in the United Kingdom, the highest in the G7.
Investors began to doubt the government’s ability to service its debt and shed UK assets, sending the pound plunging to an all-time low, and London borrowing rates soaring long-term.
Intervention
Faced with the risk of a downward spiral on long-term bond securities which weakened pension funds and risked spreading to credit conditions for households and companies alike, the Bank of England had to intervene from 28 September.
It has launched a program of up to £65 billion in long-term Treasury bond buybacks to prevent a collapse in liquidity in this market and ease price and rate volatility.
Mel Stride, the chairman of the Parliamentary Treasury Committee, hoped on Monday on Twitter that the publication of budgetary forecasts before the next meeting of the BoE could, if they manage to reassure, encourage the latter to raise its rates less than expected. interest.
This is “crucial for millions of home loan holders”, he added.
Kwasi Kwarteng’s budget presentation on September 23rd was unanimously condemned, with the IMF issuing a rare and scathing appeal to rectify the situation, and the rating agencies lowering their outlook on British debt.
Fawad Razaqzada, analyst at StoneX.com, for his part notes that the Bank of England has planned to halt its action in the UK debt market on Friday, but that investors want to see what happens from next Monday. “Investors fear there will be even more volatility”.