LONDON — The pound fell against the dollar early on Wednesday after the Bank of England confirmed it would not extend an emergency debt-buying plan introduced last month to stabilize financial markets.
Bank Governor Andrew Bailey said the program would end on Friday as planned.
“My message to the concerned (pension) funds – you have three days left now. You have to do this,” Bailey said Tuesday night in Washington. “Part of the essence of a financial stability intervention is that it is clearly temporary.”
The pound fell nearly 1% to just below $1.10 after Bailey’s speech, before recovering slightly after the Financial Times reported that the bank was, after all, ready to keep going. buy bonds past Friday’s deadline.
The bank quashed that report, saying its “temporary and targeted purchases” of government bonds “will end on October 14.”
“The governor confirmed this position yesterday and it was made absolutely clear in contact with banks at senior levels,” the bank said.
The central bank took emergency action after the UK government on September 23 announced plans for 45 billion pounds ($50 billion) in tax cuts without saying how it would pay for them. The announcement spooked financial markets and caused the pound to plunge to a record low of $1.03 against the dollar.
The Bank of England stepped in to support the bond market and stem a wider economic crisis that was particularly threatening pension funds.
On Tuesday, the bank extended its intervention, saying it would now buy inflation-linked securities – which offer inflation protection – as well as conventional government bonds as it seeks to “restore conditions ordered” in the market.
Analysts say pension funds lobbied the central bank to extend the program for two weeks, but Bailey stuck to the schedule during an appearance at the Institute of International Finance’s annual meeting in Washington.
The market turmoil has caused pain for many Britons, especially would-be home buyers, who have seen mortgage rates soar on the heightened prospect of a sharp central bank rate hike during its meeting next month.
He has also exerted intense political pressure on the Conservative government of Prime Minister Liz Truss, which took office in early September with a promise to boost growth through tax cuts and deregulation.
Friction grew between the government and the independent Bank of England. Business Secretary Jacob Rees-Mogg suggested on Wednesday that the market turmoil was primarily the result of the bank’s inability to raise interest rates as quickly as its US counterpart, the Federal Reserve.
He said the market response was “much more related to interest rates than a minor part of fiscal policy.”
Many economists dispute this view and blame the government’s budget announcement for the chaos. Announcement of £45billion in tax cuts comes on top of a £60billion plan to cap energy prices to protect homes and businesses from steep price rises caused by the invasion Russian from Ukraine.
In an effort to allay concerns, Treasury chief Kwasi Kwarteng said on Monday he would release the government’s detailed budget plans on October 31, three weeks earlier than expected.
But the government has still not made it clear how it will pay for its tax cuts, except to say that faster economic growth will boost tax revenue.
Investors fear government plans will increase public debt and fuel inflation, which is already at a nearly 40-year high of 9.9%. Economists say deep cuts in public spending will be needed. The Independent Institute for Fiscal Studies says the government may need to cut spending by up to £62billion a year to meet its public debt control targets.
In more bad financial news, the Office for National Statistics said on Wednesday that Britain’s economy contracted 0.3% in August, down from 0.1% growth in July, manufacturing and services to consumers, both registering declines.
“The economy contracted in August as output and services fell, and with a slight downward revision to July growth, the economy has contracted over the past three months as a whole. “said the bureau’s chief economist, Grant Fitzner.