Tuesday, December 6, 2022
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Why the Bank of England intervened quickly

that United Kingdom is in the grip of a true financial storm. The fiscal recovery plan presented by Liz Truss has sparked fears in the financial markets, particularly due to the planned tax cuts. The Bank of England and its governor Andrew Bailey quickly intervened, but the bond-buying program should not be enough.

Even the IMF asked United Kingdom to review his copy

Since the announcement by the Truss government of a massive tax cut plan, the pound has been in freefall and borrowing costs for UK debt have risen. This situation forced the Bank of England to intervene quickly yesterday to restore calm to the markets. But this break will not last: intervention from Bank of England only offers respite to the British authorities. First, the £65bn bond-buying program announced yesterday is temporary – two weeks off. Second, this program does not solve the fundamental problem. If investors are getting rid of their sterling and demanding high fees to lend to the British Treasury, it is because they are wondering about the state of the country. They are particularly concerned about the impact of Liz Truss’s fiscal stimulus plan on uncontrollable inflation and seriously deteriorating public finances. Even the IMF has asked Downing Street to revise its copy, fueling the feeling that United Kingdom is now considered by the financial world as a growth country. For London, the humiliation is complete.

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Liz Truss is already being challenged within her own majority over her fiscal stimulus package

However, Kwasi Kwarteng, Chancellor of the Exchequer Liz Truss is currently refusing to go back on her programme. This position is untenable: voices are already rising in the conservative majority to demand a change of course, even to ask for the leadership of the new prime minister. The Conservative Party Congress scheduled for next weekend will help to see things more clearly. Meanwhile, the crisis which United Kingdom sets an example on our side of the channel. It shows the fate that awaits the countries of the eurozone, which are tempted to abandon budgetary orthodoxy in order to fight inflation. This is enough to convince the coalition that has just been elected in Italy to give up its 40 billion euros in extra spending. This also brings water to the mill in the French government’s pension reform project. While the ECB has broader shoulders than the Bank of England, central bank support for consumer states is significantly limited in times of high inflation.

Francois Vidal

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