The Bank of England was forced into an emergency move on Wednesday to commit to buying £65 billion (€72.6bn) of the UK government’s debt, in an effort to stop the fallout from Liz Truss’s “mini-budget” turning into a full-blown economic crisis.
Market turmoil since the chancellor of the exchequer, Kwasi Kwarteng, announced the debt-funded giveaway budget last Friday had seen the UK’s borrowing costs soar and a sell-off of the pound. It also prompted the International Monetary Fund (IMF) and leading debt ratings agency Moody’s in recent days to criticise the plan.
Shares in the most exposed Irish-listed companies to the UK economy, including Bank of Ireland and convenience foods manufacturer Greencore, have also fallen sharply since Mr Kwarteng announced the blueprint to cut £45 billion of taxes over five years and spend an estimated £60 billion over the next six months alone subsidising energy bills for households and businesses. Ms Truss has promised to freeze household gas and electricity bills for two years.
Financial markets are predicting the Bank of England will need to hike its main interest rate from 2.25 per cent to 6 per cent to shore up the pound and counteract the inflationary effects of the mini-budget — at a time when UK inflation is running at about 10 per cent.
“Investors are increasingly worried that the UK’s fiscal policy is unsustainable,” said Conall Mac Coille, chief economist with stockbrokers Davy. “A move in official rates to 5-6 per cent would cause a deeper downturn to an economy already in recession and could lead to a sharp fall in UK house prices.”
The uncertainty over where interest rates are headed has prompted a number of lenders, including HSBC, Santander, Virgin Money, Halifax and Bank of Ireland, to suspend mortgage product offerings in the UK in recent days. AIB is also reviewing its mortgage products in Northern Ireland.
Shares in Bank of Ireland, which has 32 per cent of its loans book in the UK, have plunged almost 12.5 per cent from their highs last Friday. AIB, which has almost 14 per cent of its loan book in the UK, has fallen by 7.7 per cent over the same period.
Greencore, which generates more than 95 per cent of its sales in the UK, has plunged 10.3 per cent. Ryanair, which relied on customers in the UK for over 15 per cent of its revenue last year, has dropped 7 per cent.
The low-cost carrier’s chief executive, Michael O’Leary, described the UK plan as “nuts” on Wednesday, likening the energy price freeze to the infamous Irish bank guarantee of 2008, which later forced the State into an international bailout.
The value of the pound fell immediately after the Bank of England announced its move, to $1.05 — bringing its losses from last Thursday to 7 per cent. However, it had rallied to more than $1.08 by the time European markets closed.
The market interest rate on 10-year UK government debt had surged from 3.46 per cent last Friday to almost 4.6 per cent early on Wednesday. However, the Bank of England intervention sent it down to 4.01 per cent. The bank has pledged to buy long-dated UK bonds at a rate of £5 billion a day for the next 13 weekdays.
The focus earlier in the trading session had been on statements on Tuesday night from IMF and Moody’s.
The IMF, which bailed out the UK with a $3.9 billion (€4bn) loan during a sterling crisis, said the mini-budget plan would increase inequality and work against the Bank of England’s efforts to rein in inflation.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” an IMF spokesperson said.
Moody’s said the unfunded tax cuts were “negative” for the UK’s creditworthiness and likely to weigh on growth.
“A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability,” the ratings agency said.
The Department of Finance declined to comment on the market turmoil affecting the pound and British government debt. “The Department monitors developments in international financial markets on an ongoing basis,” a spokesman said.
The department would not say if there were any special arrangements in place to monitor the situation.
However, two senior figures in Government confirmed growing concern at the developments with one adding that there was also worry in governments across the EU that uncertainty could spill over into other markets.