Demands to recall parliament as UK economy left 'hours from disaster' before Bank intervened

The UK government was facing demands to recall parliament and make an urgent statement after a dramatic day which saw the Bank of England forced to intervene to stop a mass collapse of pension funds.

Pressure was growing on Prime Minister Liz Truss and Chancellor Kwasi Kwarteng amid reports that the Bank’s £65 billion buy up of government bonds – known as gilt – was triggered by fears that there would have been mass insolvencies of pension funds within hours.

The Bank’s extraordinary intervention, responding directly to the Government’s tax-cutting strategy in last week’s mini-budget, came after the pound hit an all-time record low of 1.03 against the US dollar on Monday.

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Meanwhile, the International Monetary Fund, in a highly unusual move, had earlier flagged serious concerns about the mini-budget. In a statement, the IMF said it was “closely monitoring” developments in the UK and was in touch with the authorities, urging the Chancellor to “re-evaluate the tax measures”.

The Chancellor meets representatives from the investment banking sector. Picture: Simon Walker / HM TreasuryThe Chancellor meets representatives from the investment banking sector. Picture: Simon Walker / HM Treasury
The Chancellor meets representatives from the investment banking sector. Picture: Simon Walker / HM Treasury

It warned the current plans, including the abolition of the 45p rate of income tax for people on more than £150,000, were likely to increase inequality.

The scale of the crisis in the markets led to unease in some quarters of the Tory party, while Labour and the SNP joined calls for Parliament, currently on a conference recess, to be recalled.

“The Government has clearly lost control of the economy,” said Labour leader Sir Keir Starmer.

“What the Government needs to do now is recall Parliament and abandon this budget before any more damage is done.”

First Minister Nicola Sturgeon said the economic fallout could be worse than 2008, and called for “very urgent and immediate action” to reverse the planned income tax cuts for the highest earners.

There were signs of outright worry within the Tories, with MPs – some of whom backed Rishi Sunak in the leadership contest – making public their own unhappiness with the political and economic chaos of recent days.

Mel Stride, Conservative chairman of the Commons Treasury Committee, warned “there’s a lot of concern within the parliamentary party, there’s no doubt about that”.

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However, amid silence from the Prime Minister and Chancellor, the Financial Secretary to the Treasury Andrew Griffith insisted the Government was sticking to the plan set out by Mr Kwarteng in the Commons on Friday.

“What the Chancellor and I are focused on is delivering that economic growth plan,” he said.

“We think they are the right plans because those plans make our economy competitive.”

Mortgage borrowers have also been hit by a record overnight drop in the choice of home loan products as the economic fallout continues.

It all comes just days before Tory MPs and thousands of members will descend upon Birmingham for Ms Truss’ first party conference as Prime Minister.

The Bank announced yesterday it was acting at an “urgent pace” saying “were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability”.

“This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.

“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

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The Treasury responded by reaffirming its commitment to the Bank of England’s independence and said the Government “will continue to work closely with the Bank in support of its financial stability and inflation objectives”.

The Bank said it would buy bonds “on whatever scale is necessary” in order to steady gilts after Mr Kwarteng’s mini-budget spooked the markets with his package of tax cuts and increased borrowing.

It said the bond-buying programme would be temporary, starting from today until October 14.

It follows days of intense pressure on defined benefit pension funds, which manage savings for millions of Britons, which had been using gilts in so-called liability-driven investment (LDI) strategies that many use to protect themselves against adverse moves in inflation.

Some £1.5 trillion is invested in their LDI strategies, of which £1 trillion is invested in bonds, and pension funds have been racing to sell gilts to meet calls for more collateral, but this has been forcing the already tumbling price of gilts lower.

On Wednesday, Mr Kwarteng “underlined the government’s clear commitment to fiscal discipline” at a meeting with Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg amongst others.

He also told the meeting that the plan announced on Friday would “expand the supply side of the economy through tax incentives and reforms, helping to deliver greater opportunities and bear down on inflation”, according to a Treasury readout.

Representatives from Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg were called to attend a meeting with Mr Kwarteng following days of turmoil.

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Ms Sturgeon warned of an “unfolding and rapidly deteriorating economic and financial crisis” as she gave evidence to a special Holyrood committee.

Speaking to a group of Holyrood’s committee conveners, Ms Sturgeon said: “I think it is quite hard to overstate the impact that Friday’s budget will have on poverty, inequality and the financial stress that millions of people are going to be living under.”

She said the wider impacts of the budget “are likely to be much greater than those immediate impacts”, adding: “Obviously since Friday we’ve seen the collapse in the pound, that will fuel inflation, which will make the cost-of-living crisis worse.

"We’re already seeing the cost of government borrowing increasing but there is now, I think, the inevitability of a sharp rise in interest rates, which is going to have a very profound impact on those with mortgages, those with credit card debt, and that will push more people into very serious financial stress.

"We’ve had warnings in the last 24 hours from the IMF. We’ve just had the quite extraordinary – that’s a word that’s overused in political discourse, I think it’s appropriate this morning – intervention of the Bank of England, concerned about serious financial instability.”

Ms Sturgeon added: “It is really extraordinary and unprecedented and I do think there needs to be very urgent and immediate action taken.

"I don’t think we should see the policies announced on Friday as inevitable now – I think as an immediate symbol of some kind of good sense being restored, the decision to abolish the top rate of tax should be reversed.”

The First Minister continued: "The UK as we speak right now is in the midst of an unfolding and rapidly deteriorating economic and financial crisis.

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"It’s going to be ordinary people who pay the price of that.

"I don’t think we’ve had a more serious economic situation, possibly even including 2008, which was a global financial crash, but in the UK probably not a more serious situation in our memories.”

Ms Sturgeon’s comments came as her deputy, John Swinney, who is in control of the Government’s finances while Finance Secretary Kate Forbes is on maternity leave, said he was “very concerned” about the IMF statement.



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