Harold Wilson used to quip that “a week was a long time in politics.” Try telling that to the markets at the moment where events are moving at a fast pace with the current financial crisis in the UK showing no signs of abating piling more pressure on prime minister, Liz Truss, and her chancellor, Kwasi Kwarteng..
Bruising attacks on the UK government’s economic policies by the International Monetary Fund and Moody’s have been followed by a direct intervention by the Bank of England in the gilts market to avoid "a material risk to UK financial stability" by buying unlimited quantities of long-dated government bonds.
One City source told Sky’s Sam Coates “it’s hard to overstate how serious the situation is today. There is concern over the health of pension funds and this is why the Bank of England has acted.”
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management said: “We are in crisis territory right now, and emergency action has to be taken.”
Capital Economics said the Bank’s action was welcome but “the fact that it needed to be done in the first place shows that the UK markets are in a perilous position.”
“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long” and “the chancellor’s 2.5% real GDP growth target is looking even more unachievable.”
Neil Wilson at Markets.com said “Coming so soon after Monday’s statement it again reeks of a lack of credibility.”
Credibility is at the heart of things with the reputations of both the Bank of England governor, Andrew Bailey, and the chancellor hardly topping the charts with investors.
The Bank, already under pressure for appearing to behind the curve in dealing with inflation, now has a fine balancing act of calming financial markets without undermining the policies of the UK government.
In fairness the Bank faces a tricky dilemma as today’s events show.
On one hand it has unleashed a bond buying spree to try and bring rates down while at the same time signalling that rates will be increased aggressively to tackle soaring inflation.
It may be wishing that the Government follows the IMF’s call to reverse some, if not all of its planned tax cuts, a move that Samuel Tombs, chief UK economist at Pantheon Macroeconomics said “would help to alleviate the stress in the foreign exchange and gilt markets.”
But Tombs pointed out that “the government’s actions to date have eroded confidence among global investors, which cannot be easily restored.”
Actions that were heavily criticised by the IMF which launched a stinging rebuke of the government’s fiscal plans.
In an unprecedented critique if G7 country it warned "untargeted fiscal packages" were not recommended at a time of high inflation.
While this was not any type of 1976-style bailout conversation, it is the sort of warning the IMF more typically makes to emerging economies.