BoE to Purchase Bonds Amid Historic Pound Slump

Facts

• The Bank of England (BoE) announced Wednesday that it would temporarily purchase UK government bonds “on whatever scale is necessary” to calm the market amid a historic selloff of bonds following the government's announcement of a significant tax-cut and borrowing package last week.
• Despite the BoE's intervention, the pound sterling continued to drop against the dollar, having dropped to its lowest ever level of $1.0327 against the dollar on Monday.
• Many observers in the financial sector have blamed the UK government’s proposed tax cuts — which will be funded by increased borrowing — for the collapse in the bond market.
• The last couple of days has seen some pension funds forced to liquidate their bonds, further decreasing bond prices and adding to a vicious cycle of more selloffs and subsequent drops in prices. In an attempt to break this circle, the bank has said it will purchase around £65B in bonds.
• The BoE has been raising interest rates in the hope that it will reduce inflation from its current rate of 10%. There's a belief among financial institutions — including the International Monetary Fund — that the proposed tax program could further exacerbate inflation, resulting in more rate hikes and further risk of a recession.
• As part of its efforts to tame inflation, the BoE is also planning on trimming its government bond holdings by £80B over the next 12 months. Despite the recent developments, the bank said it intends to stick with this target but has pushed back the start of sales to Oct. 1.

Sources: CNN, Guardian, BBC News, Forbes, and Financial Times.

Narratives

• Right narrative, as provided by The Telegraph. Liz Truss's economic plan makes complete sense. The PM — who is in a race against time; facing the prospect of an election in two years and an impending recession — has finally reprioritized boosting growth and shrinking the state. While lower taxes and allowing the Bank of England to tackle inflation by raising interest rates may be painful at first, it's the right thing to do in the long term.
• Left narrative, as provided by The Guardian. Studies have shown that tax cuts don't fuel growth. The UK already has the lowest corporate tax rate in the G7 and one of the softest regulatory regimes along with it. "Trickle-down" economics is a failed policy, and further tax cuts under these circumstances make no sense whatsoever.