Bank of England intervenes to stem crisis as IMF calls out U.K. over tax cuts

The central bank warned that crumbling confidence in the economy posed a “material risk to U.K. financial stability,” while the International Monetary Fund took the rare step to urge a member of the Group of Seven advanced economies to abandon its plan to cut taxes and increase borrowing to cover the cost.Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.

The British pound plunged to a record low against the U.S. dollar Monday following the government’s announcement, and yields on U.K. government debt soared. Yields on 10-year government bonds have risen 325 per cent this year, making it much more expensive for the government to borrow to finance its policies.Article content

The pound traded at US$1.0628 on Wednesday in London, after rallying from a record low of US$1.0373 on Monday. The British currency is still down four per cent since Friday, and it has fallen 20 per cent against the dollar in the past year. But the bank’s next scheduled meeting is not until November, and the lack of immediate action did little to bolster the pound. The bank was able to step in immediately with bond purchases because its Financial Policy Committee has a mandate to ensure the stability of the financial system.Article content

The U.K. government has resisted pressure to reverse course but says it will set out a more detailed fiscal plan and independent analysis from the Office for Budget responsibility on Nov. 23. The central bank was spurred to act after volatility in financial markets spilled over into the broader economy, raising borrowing costs for the government, limiting mortgage options for homebuyers and forcing some pension funds to sell long-term government bonds used to manage risk.

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