The Bank of England said it would further expand its emergency bond-buying program as it warned that the ongoing sovereign debt disaster posed a risk to financial stability.
Traders continued to dump bonds this week, putting pressure on the price of government borrowing and posing a “material risk to UK financial stability”, according to the central bank.
The Bank announced on Tuesday morning that it will now widen the scope of its bond buying plan to include index-linked bullion purchases in a bid to prevent a “fire sale”.
“At the start of this week there was further significant appreciation in UK government debt, particularly index-linked grains,” it said. “The dysfunction in this market and the prospect of a self-reinforcing ‘fire sale’ dynamic poses a significant risk to UK financial stability.”
It comes as the Institute for Fiscal Studies (IFS) warned the government would need to make £60bn of cuts to balance the books by 2026-27.
If Liz Truss and her chancellor Kwasi Kwarteng do not give up their tax cuts, they will have to make “painful” public sector cuts of 15% to bring the debt under control, the IFS has found.
But Deputy Prime Minister Therese Coffey insisted on Tuesday that the UK’s public finances were still in “good shape”. Asked about future cuts, she told Sky News: “I’m just not going to get into hypotheticals.”
Ms Coffey also denied that Mr Kwarteng had advanced his medium-term fiscal plan from November 23 to October 31 because markets were spooked.
Senior Tory MP Mel Stride, chairman of the Treasury select committee, warned that Mr Kwarteng may need to go further if he is to calm jittery markets.
“The best option of all options is that what the chancellor proposes on October 31 adds up, the markets have confidence in that and we start to see an easing of these rising interest rates, the pressure on borrowing costs, mortgages and so on,” he told the BBC Newsnight.
Mr Stride added: “And it is possible to do that, but it may require a huge amount of political courage on his part, possibly even going further back on the tax cuts that have come in.”
Tory MPs said The independent they would oppose major cuts to public sector spending, after the IFS warned of a return to austerity to tackle the black hole in public finances.
Kevin Hollinrake said: “Many MPs would have concerns if there were spending cuts that impacted on frontline services or made constituents worse off in terms of welfare. In terms of the impact on public services, as well as welfare, the spending cuts will be extremely difficult to get through the House.”
A former minister supporting Rishi Sunak said The independent: “There is no way Tory MPs will be subjected to savage austerity in a post-Covid cost of living crisis. Liz has driven herself into a dead end.”
Ms Truss faces growing opposition within her own party over proposals not to increase benefits due to inflation, a move that would amount to real cuts for the most vulnerable.
Mr Kwarteng is due to answer questions from MPs about his budget plans in the Commons today, with Treasury questions set for Tuesday afternoon.
Labor is calling on the chancellor to reverse course on the ‘kamikaze’ tax cut mini-budget. “It will be down to Labor to clean up the Tory mess once again,” shadow chancellor Rachel Reeves said.
Shadow Chancellor of the Exchequer Pat McFadden said news that the Bank of England “had to step in for the second day in a row to reassure markets shows that the government’s approach is not working”.
The Bank of England said on Monday it would double the daily limit on its gold-buying program from £5bn to £10bn as it brings the scheme to a “rational” close before the end of Friday.
Long-term gold prices fell, which sent 30-year bond yields soaring to 4.7% on Monday – their highest level since the Bank of England was forced to intervene last month in the wake of the mini-budget.
The Bank said its latest efforts “will act as a further backstop to restore orderly market conditions”.
It comes as the Office for National Statistics (ONS) reported that the jobless rate fell to 3.5% in the three months to August – the lowest since February 1974.
However, the new data also showed another slight improvement in wages, but it continues to lag far behind inflation. Average pay, excluding bonuses, rose 5.4 percent in the three months from June to August. However, inflation reached 9.9% in August.