The Bank of England took emergency action Wednesday to stabilize UK financial markets and head off a crisis in the broader economy after the government spooked investors with a program of unfunded tax cuts, sending the pound tumbling and the cost of government debt soaring. The Bank of England said it would buy long-term government bonds over the next two weeks to combat a recent slide in British financial assets. The bank's actions are focused on long-term government debt: Yields on 10-year government bonds have risen 325% this year, making it much more expensive for the government to borrow to finance its policies, per the AP.
Yields, which measure the return buyers receive on their investment, had risen to 4.504% on Tuesday from 3.495% the day before the tax cuts were announced. The Bank of England's announcement caused 10-year bond yields to fall to 4.235% in midday trading in London. "Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability," the Bank of England said in a statement. The Washington Post calls it "a highly unusual market intervention in hopes of slowing the rush to dump pounds and UK bonds." The move came five days after Prime Minister Liz Truss' new government sparked investor concern when it unveiled an economic stimulus program that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions.
It also wants to spend billions to help shield homes and businesses from soaring energy prices, sparking fears of spiraling government debt and higher inflation, which is already running at a nearly 40-year high of 9.9%. The British pound plunged to a record low against the US dollar Monday following the government's announcement. The pound traded at $1.0628 on Wednesday in London, after rallying from a record low of $1.0373 on Monday. The British currency is still down 4% since Friday, and it has fallen 20% against the dollar in the past year.
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