The central bank stops a British financial crisis


The first steps of the new government of Liz Truss are fueling mistrust in the capital markets

The Bank of England had to intervene in the capital markets on Wednesday and buy up government debt to reduce the risk of rising interest rates and financial instability. Bond and currency markets have reacted negatively to last Friday’s announcement by the new UK government of an increase in UK debt.

After her appointment on 6 September, the Prime Minister encouraged to “rebuild the economy … and to become “the shiny and modern United Kingdom that I know we can become”. But since that day, the value of UK assets in the markets has fallen by some €500,000m, according to Bloomberg.As the Irish joke goes, Liz Truss shouldn’t start from here to get to your destination.

Finance Minister Kwasi Kwarteng has started his job unhappily. Since the resignation of the former Prime Minister, Boris Johnson, on July 8, two months of the Conservative election campaign had passed in which it was taken for granted that Truss, her friend and co-religionist in the libertarian movement of the Conservative Party, would make her the second position in the cabinet hierarchy.

After confirmation in his position, on the 6th, political activity was paralyzed by the death of Isabel II. He had more than 40 days to prepare the rapid-impact strategy envisioned by the prime minister and her advisers. And he presented a mini-budget, with a list of subsidies to alleviate the rise in energy prices and tax cuts.

The minister did not want the Tax and Customs Administration to issue its usual auditor’s report on the state accounts about the financial consequences of the announced measures. He postponed the presentation of a budget with measures and forecasts of income and expenditure until November. But the markets have not waited. This Tuesday, he received major bankers to work out his plan and stop the crash.

Seems like a case of arrogance. After rejecting the idea of ​​giving subsidies to dampen energy prices during his campaign, Truss has given the green light for a more generous plan than Labor’s proposal. Announced tax cuts benefit the wealthiest, and Kwarteng also ended caps on performance bonuses in bank payments. Maybe he wanted to please the markets. If so, it has not worked and those measures are strengthening the opposition.

The UK has a debt equal to its annual GDP -comparable to or less than that of other major European economies- but today, many believe, is suffering from a crisis typical of emerging economies. Kwarteng’s announcement of more debt is said to have sparked mistrust in the government, which is prioritizing boosting growth and promising to begin deleveraging in three years’ time.

The pound has fallen to historic levels in its parity with the dollar, strong in world conditions. In addition to the full Kwarteng budget, the central bank’s Monetary Policy Committee will also hold its next meeting in November, where a notable rate hike is expected. Currently that is 2.25%. Inflation is 9.9%.

This mini-crisis may coincide with the annual conferences of the parties. Labour, leading 17% in the polls, closed the meeting on Wednesday. They have described a future of industrialization, led by a publicly traded company and aimed at transforming the country into the most advanced in renewable energy. Starting this Sunday, Truss defends his model of economic impulse through a reduced state, before a “story” militancy worries about its first steps.

Source: La Verdad


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