UK stocks, sterling slip as BoE intervenes after IMF slams budget

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The pound is falling and stocks are rebounding after the Bank of England said it was buying long-term UK government bonds.

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The Bank of England stepped in to boost market confidence in the UK after the International Monetary Fund criticized Britain’s inflation-fighting budget.

Reacting to market turmoil, the Bank of England announced on Wednesday that it was temporarily buying long-term UK government bonds “in order to restore normal market conditions.”

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However, the British pound quickly fell 1.7 percent to $1.0552 and British stocks recovered some of their sharp losses.

The blue-chip index shed 0.3 percent after falling 2.1 percent earlier in the session, while the more domestically oriented FTSE 250 shed 1.4 percent.

The Bank of England’s intervention followed on Tuesday criticism from the IMF, which argued that the British budget could increase inequality and exacerbate inflation.

Credit rating agency Moody’s also warned of a skyrocketing debt.

Great tax breaks

Significant tax cuts and energy price freezes by Chancellor of the Exchequer Kwasi Kwarteng aimed at stimulating a recession-threatened UK economy appear to have had the opposite effect as traders warn of inflating debt to pay for benefits.

Following last Friday’s budget, UK government bond yields soared and the pound fell to a record low of $1.0350.

View of the Bank of England in London [File: Kirsty Wigglesworth/AP]

Critics added that Kwarteng’s measures would benefit the rich more than the poorest as millions of Britons suffer from a cost-of-living crisis.

“We acted quickly to protect households and businesses during this and next winter, after an unprecedented increase in energy prices,” the Treasury Department said, seeking to protect itself.

“We are focused on growing the economy to improve the standard of living for everyone,” he added, blaming sky-high prices for oil, gas and electricity for Russia’s full-scale invasion of Ukraine.

criticism of the IMF

In a highly unusual speech late on Tuesday, the IMF said it was “watching closely” developments and urged the government in London, led by new prime minister Liz Truss, to change course.

The fund added: “We understand that the significant financial package announced is aimed at helping families and businesses cope with the energy shock, as well as accelerating growth through tax cuts and supply measures.

“However, given elevated inflationary pressures in many countries… we do not recommend large and untargeted fiscal packages at this stage.”

The IMF said “the UK’s measures are likely to increase inequality” and stressed the importance of fiscal policy not working “contrary to monetary policy”.

Analysts have warned that the UK’s controversial moves could force the Bank of England to raise interest rates much higher than forecast.

“Expectations that the Bank of England will raise interest rates sharply to try to counter the government’s bust on tax cuts and spending have intensified,” Suzanne Streeter, an analyst at Hargreaves Lansdown, told AFP on Wednesday.

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