Mini-budget U-turn ruled out despite Bank of England’s emergency action

Published

2 years ago

September 29, 2022

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The government has ruled out a U-turn on the costly tax-cutting mini-budget and the chancellor will not resign despite mounting pressure.

It comes after a day in which the Bank of England was forced to launch a temporary bond-buying programme as it took emergency action to prevent “material risk” to UK financial stability.

Bank’s ‘nearly unthinkable’ intervention – economy latest

Sky’s political editor Beth Rigby was told that the chancellor, Kwasi Kwarteng, would not be resigning and that there would be “no reversal of policy”.

A minister told deputy political editor Sam Coates it was “bulls***t” to say that today’s market movement was related to the mini-budget announcement.

And on The Take with Sophy Ridge, chief secretary to the Treasury Chris Philp denied that the government had any responsibility and said there would be no change of course.

Politics Hub: No mini-budget reversal and chancellor will not resign

The Bank will buy as many long-dated government bonds as needed between now and 14 October in a bid to stabilise financial markets in the wake of the mayhem that followed the government’s mini-budget last Friday.

In addition to the plunge in the value of the pound, it has also seen investors demand a greater rate of return for UK government bonds – essentially IOUs.

That is because the level of borrowing required to fund the government giveaway, including tax cuts and energy aid for households and businesses, shocked the market which immediately questioned the sustainability of the public finances.

City minister Andrew Griffith told Sky’s economics editor Ed Conway: “Every major economy is dealing with exactly the same issues.”

“They [the bank] have made a targeted and timely intervention in the market. That’s their decision, but they’ve done so working very closely with the chancellor.”

The Bank’s action comes after the International Monetary Fund added its voice to criticism of the growth plan.

What the Bank’s action is aimed at doing is tackling the consequences of rising bond yields, in this instance a liquidity crunch facing pension funds.

The pound fell back in response but bond yields did ease back from multi-year highs.

WHY THE BANK OF ENGLAND HAS ACTED

Ian King

Business presenter

@iankingsky

There are some very, very specific reasons why the Bank of England is intervening in this particular asset class in long-dated gilts – that’s gilts of a 20 to 30 year duration.

It affects traditional pension funds where a retiree is guaranteed a certain payout at their retirement based on their final salary when they retire.

Now, a lot of these funds use long-dated gilts as part of their investments and what has been happening over recent days is a lot of the investment funds have been asking pension funds to post more collateral – to put up cash.

It has been reported in The Times that actually these cash calls have been running into tens of billions of pounds since the beginning of the week because of this spike in long-dated gilt yields.

That is why the Bank of England is specifically targeting that with this gilt intervention.

It is aimed at seeing off a crisis that’s potentially starting to emerge in pension funds.

The Bank said in a statement: “Were dysfunction in this (long-dated bond) 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.”

‘Significant’ interest rate rise likely ahead

The programme marked the Bank’s first policy intervention as it battles to bring down inflation and ease the cost of living crisis. Its chief economist signalled on Tuesday that a “significant” rise in Bank rate was also likely ahead.

The government’s growth plan is only seen as adding inflationary pressure to the economy, leaving it at loggerheads with the Bank’s mandate.

The Bank said the bond purchases, which would be fully covered by the Treasury in the event of any losses, would be sold back once market conditions had stabilised.

The announcement certainly had an immediate effect on the market.

Data showed that 30-year bond yields fell back to 4.3%, having risen to levels above 5% not seen since 2002 earlier in the day. There were similar falls for 20-year yields.

Those for 10-year bonds also fell back below 4% from 4.6%.

Stock markets, which had endured widespread falls Europe-wide amid recession fears, erased some of their losses.

The FTSE 100 had been almost 2% down but was just 0.8% lower on the day just before 1pm.

The pound, however, was a cent and a half down versus the dollar shortly after the announcement, to stand at $1.0578, and a cent lower against the euro. It later moved back towards $1.07 as market surprise at the intervention eased.

The single European currency was also suffering against a resurgent US currency.

Bank going ‘toe-to-toe’ with the market

The Bank said it would also postpone its efforts to unwind the sale of bonds it acquired through quantitative easing during the financial and COVID crises.

The Bank had planned to reduce its £838bn of gilt holdings by £80bn over the next year.

Neil Wilson, chief markets analyst at Markets.com, said the move followed evidence of “severe liquidity stress”.

This would have been particularly evident for pension funds who have faced demands for additional cash to cover off rising yields.

“We’re now seeing the Bank go toe-to-toe with the market and this might not lead to any decrease in volatility.”

UK

Rishi Sunak admits Tories may not win general election and claims UK heading for hung parliament

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2 hours ago

May 6, 2024

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Rishi Sunak admits Tories may not win general election and claims UK heading for hung parliament

Rishi Sunak has admitted the Tories may not win the general election after grim defeats in the local polls.

The prime minister suggested the UK was on course for a hung parliament and claimed voters would not want to see Labour leader Sir Keir Starmer “propped up in Downing Street” by the SNP or smaller parties.

In an interview with The Times, Mr Sunak pointed to Sky News analysis of the local election results by election expert Professor Michael Thrasher which suggested Labour would be the largest party in a hung parliament.

Politics live: PM told to ‘wake up and smell the coffee’ after elections

“These results suggest we are heading for a hung parliament with Labour as the largest party,” Mr Sunak told the paper.

“Keir Starmer propped up in Downing Street by the SNP, Liberal Democrats and the Greens would be a disaster for Britain.

“The country doesn’t need more political horse-trading, but action. We are the only party that has a plan to deliver on the priorities of the people.”

Meanwhile, Tory rebels have warned the prime minister to change his political course after the weekend’s local election results.

Sunak urged to take party towards right

Former home secretary Suella Braverman urged him to mould the party towards the right in order to win back voters.

But she told the BBC a change of leadership was not a “feasible prospect,” adding: “There is no superman or superwoman out there who can do it.”

Ms Braverman urged the prime minister to adopt several measures to win back voters, including further tax cuts and a cap on legal migration.

Tories ‘up for the fight,’ minister insists

But Transport Secretary Mark Harper insisted Mr Sunak and the Tories are “up for the fight” of a general election despite their terrible results in the local contests.

Talking to Sky News’ Sunday Morning With Trevor Phillips, the minister said: “I think the key thing that people need to do now is get behind the prime minister, focus on the things the government is focused on delivering – the British people’s priorities around the economy, dealing with migration – and get out there and take that fight to the country ahead of the general election.”

Labour won 1,158 seats in the 107 councils in England that held elections on 2 May, an increase of more than 232.

The Liberal Democrats won 552 seats, up nearly 100, while the Tories came in third place on 515 seats, down nearly 400.

UK

Rishi Sunak rides out leadership challenge – but faces ‘exhausted and broken’ Tory party when parliament returns

Published

2 hours ago

May 6, 2024

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Rishi Sunak rides out leadership challenge - but faces 'exhausted and broken' Tory party when parliament returns

Rishi Sunak’s internal critics have abandoned their attempt to unseat him because they have run out of time and do not believe Penny Mordaunt would do what is necessary to save the party.

The Politics at Jack and Sam’s podcast this week discusses how the PM is unlikely to face a challenge but will be confronted by an exhausted, sceptical and in parts broken Tory party when Parliament returns on Tuesday.

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He faces legislative challenges in the coming weeks, with revolts on the criminal justice bill and sentencing bill, that could be aggravated by the party’s poor performance.

However, efforts by plotters – a loose band co-ordinating to bring down Sunak dominated by ex advisors rather than Tory MPs – have been abandoned.

They are understood to believe the local elections show the Tories still on course for annihilation but they have run out of time, and the window for a challenge was back in December or January.

They had hoped a suitable candidate would emerge and the closest they came to believing someone was interested was with Penny Mordaunt, though she has denied plotting. In the end, rebels concluded she would not do what it takes. They also said the political cost of changing leader increased sharply in recent months.

Sunak is now hoping Britain coming out of recession this Friday will help turn his fortunes around.

UK

UK considered using Iraq to process asylum seekers in Rwanda-type deal, leaked documents show

Published

5 hours ago

May 6, 2024

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UK considered using Iraq to process asylum seekers in Rwanda-type deal, leaked documents show

The government at one point considered using Iraq to process asylum seekers – like the Rwanda scheme – according to documents seen by Sky News.

This could have seen people sent from the UK to a country the government advises against all travel to.

The two countries already have a returns agreement – but only for people that are from Iraq.

Politics live: Follow the latest updates here

According to leaked correspondence between high-ranking officials, the Iraqi returns commitments were made with a “request for discretion” and no publicity.

The country was willing to move forward but did not want a formal or public agreement.

The current travel advice to Iraq on the Foreign Office website simply advises against “all travel to parts of Iraq”. However, according to the document, negotiations were fairly advanced and described in one table as “good recent progress with Iraq”.

Other government aims included enhancing cooperation with the Iranian Embassy in order to enhance returns arrangements for migrants and potential asylum seekers.

Returns agreements are also in the works for Eritrea and Ethiopia, according to documents about work undertaken by the Home Office and Foreign Office that relates to countries with the highest number of nationals arriving to the UK by small boats.

In a tranche of internal government documents seen by Sky News, even from the earliest stage of the Rwanda policy, Downing Street advisers knew there were serious problems with their proposals.

There are even private admissions that many people arriving here on small boats did so without the assistance of criminal gangs – despite their communications strategy.

Comparisons were also made to Australia’s response – to what Downing Street officials understood to be a comparable “smaller problem” than in the UK and admitted it had cost billions of Australian dollars in order for their returns processes to be fully operational.

In one document submitted to the Home Office, some of the highest-ranking officials at the time wrote that their guidance was to be “prepared to pay over the odds” to get the policy up and running. And that the initial offer from Rwanda was a “modest sum”.

Whitehall’s official spending watchdog has priced the cost of sending asylum seekers to Rwanda at £1.8m per person for the first 300 people the government deports to Kigali.

It also disclosed that since April 2022 the Home Office has paid £220m into Rwanda’s economic transformation and integration fund, which is designed to support economic growth in Rwanda, and will continue to make payments to cover asylum processing and operational costs for individuals relocated to Rwanda.

It will also pay further amounts of £50m over the next year and an additional £50m the following year.

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A government source said: “The Home Office is spending millions every day accommodating migrants in hotels – that’s not right or fair. We’re taking action to put an end to this costly and dangerous cycle. Doing nothing is not a free option – we must act if we want to stop the boats and save lives.

“The UK is continuing to work with a range of international partners to tackle global illegal migration challenges. Our Rwanda partnership is a pioneering response to the global challenge of illegal migration, and we will get flights off the ground to Rwanda in the next nine to eleven weeks.”