Claims by British Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Karteng are wrong. That says the Bank of England in a letter to the British House of Commons.
The Truss administration claimed that a downturn in UK stock markets recently was part of a global decline. But the British central bank points emphatically to the financial policy of Truss and Kwarteng as the cause.
Last month, the British government launched a bailout too, among other things, to restore the purchasing power of the British to a total of 65 billion pounds. This was linked to the budget. This caused unrest and forced the British central bank to intervene, according to the Bank of England (BoE).
The problems in the financial markets arose on September 23 when Minister Kwasi Kwarteng explained his budget plans. The Treasury Secretary announced significant tax cuts along with additional spending to help businesses and households with their energy bills. This will require the country to borrow tens of billions of pounds, fueling fears that inflation will continue to rise despite all the rate hikes.
Kwarteng’s package caused the pound to fall sharply. Kwarteng’s plans also caused a sharp drop in government bond prices. As a result, the BoE intervened with the purchase of government bonds. This protected pension funds, among other things, from a partial collapse.
In a letter to the Parliament’s Financial Affairs Committee, Vice Governor Jon Cunliffe said the BoE had no choice but to intervene. This prevented fund managers from dumping £50 billion in gilts and causing a market crash. When bond prices collapsed, funds had to raise money to meet the demand for collateral.
Cunliffe’s comments are at odds with the government’s story about the market turbulence. But, then, Kwarteng dismissed the panic as “a bit of turbulence”, and Prime Minister Liz Truss blamed global factors as part of broader market developments.